pooling of funds

[SLBRealEstate]

Hello all,

This is my first post. It`s rather long but interesting if the idea`s possible. First a little background.
My name`s Steve, and I live in Kitchener, Ont. - REIN top town. I am 1 of 3
partners who created a Real Estate Investment Company last year. We purchased our first property
( in a booming market ) at a rock bottom price, fixed it up and re-sold it. We did it a second time immediately
following the sale of the first property. The second one sold in several weeks just like the first. Then the recession came and we do not want to "flip" houses anymore. We did almost all the work ourselves and made a small amount of profit. It was enough to pay off all of our original investments that we made in starting
the business - tools, training, computer, printers, etc...
What we really want to do now is to start buying property to hold and rent - the REIN philosophy.

I know we are not the only ones short on capital. Most of us are.
I thought I`d throw this idea out there and see if it`s possible to do.
Is it even possible in Ontario?
What kind of legalities are there?

If a duplex cost $200,000 - we put 20% down, therefore no CMHC.
All closing costs including down payment come in at $50,000 and the property cash flows.
Finding a single joint venture partner to put up 50K for 50% of the profits is a rather difficult task.

What if we were to market the idea of investing in said property and get multiple people to pool smaller
amounts of monies together to invest in the property.

Investor #1 puts in $10,000 = 20% of down payment
Investor #2 puts in $5,000 = 10% of down payment
Investor #3 puts in $15,000 = 30% of down payment
Investor #4 puts in $10,000 = 20% of down payment
Investor #5 puts in $10,000 = 20% of down payment

The total $50,000 is now available. All investors are entitled to 50% of the profits.
Each investor would get their pro-rated percentage of that 50%.
Example investor #1 put in 20%, therefore they get 20% of the investors
share of the profits.

I know you can`t have all these people on title. Is it possible to just have
myself and my company partners on title and mortgage, with some kind of contract
written up between our company and each investor that states the above senario?

Does this makes any sense?

Any thoughts would be greatly appreciated. There`s got to be a way !!

Steve

 

[ChrisMewhort]

QUOTE (SLBRealEstate @ Mar 12 2009, 07:48 PM) Any thoughts would be greatly appreciated. There`s got to be a way !!

Steve
Hi Steve,

I think the issue that people fear in this case (and I may be wrong, but it`s what scares me about this) is that even when all following a strategy such as REIN`s, there are always disagreements on issues and how things should be done. Who gets appointed the "decision maker" and what happens when he/she makes a costly mistake?

My mom would kill me if she knew I let this opportunity pass without quoting one of her favourite sayings, "Too many cooks spoil the broth." I think it holds true especially true in this situation.

 

[TodorYordanov]

Hi Steve, a Joint Venture agreement, when properly written, will deal with all these issues and many more that you may not be aware of at the moment.
As far as having 5 people to cover a down payment of 50% although possible it over-complicates the transaction. 200,000 investment property is not a huge deal that needs to have 8 people involved in it. Most of your problems will come from that. And what is wrong with paying CHMC if you are holding long term? Buy it with as few $ as possible, but make sure it cash-flows!

 

[ekisielewski]

QUOTE (SLBRealEstate @ Mar 12 2009, 07:48 PM) Hello all,

This is my first post. It`s rather long but interesting if the idea`s possible. First a little background.
My name`s Steve, and I live in Kitchener, Ont. - REIN top town. I am 1 of 3
partners who created a Real Estate Investment Company last year. We purchased our first property
( in a booming market ) at a rock bottom price, fixed it up and re-sold it. We did it a second time immediately
following the sale of the first property. The second one sold in several weeks just like the first. Then the recession came and we do not want to "flip" houses anymore. We did almost all the work ourselves and made a small amount of profit. It was enough to pay off all of our original investments that we made in starting
the business - tools, training, computer, printers, etc...
What we really want to do now is to start buying property to hold and rent - the REIN philosophy.

I know we are not the only ones short on capital. Most of us are.
I thought I`d throw this idea out there and see if it`s possible to do.
Is it even possible in Ontario?
What kind of legalities are there?

If a duplex cost $200,000 - we put 20% down, therefore no CMHC.
All closing costs including down payment come in at $50,000 and the property cash flows.
Finding a single joint venture partner to put up 50K for 50% of the profits is a rather difficult task.

What if we were to market the idea of investing in said property and get multiple people to pool smaller
amounts of monies together to invest in the property.

Investor #1 puts in $10,000 = 20% of down payment
Investor #2 puts in $5,000 = 10% of down payment
Investor #3 puts in $15,000 = 30% of down payment
Investor #4 puts in $10,000 = 20% of down payment
Investor #5 puts in $10,000 = 20% of down payment

The total $50,000 is now available. All investors are entitled to 50% of the profits.
Each investor would get their pro-rated percentage of that 50%.
Example investor #1 put in 20%, therefore they get 20% of the investors
share of the profits.

I know you can`t have all these people on title. Is it possible to just have
myself and my company partners on title and mortgage, with some kind of contract
written up between our company and each investor that states the above senario?

Does this makes any sense?

Any thoughts would be greatly appreciated. There`s got to be a way !!

Steve

Hi Steve: I also think it is too many people involved for a single family home investment. If numbers work you are better off by paying the CMHC insurance, which gets added to your mortgage and threfore, financed, than give up 50% ownership.

Another option is to borrow private money at a higher rate from each one of your partners to come up with the downpayment.

You may want to contact Mary Flynn. She is a Rein member and this is how she got started a few years ago: by having 5 to 6 investors per house. I am sure she will not mind sharing her experience with you.

Good Luck

Elisabet Kisielewski

 

[seanverret]

Hi Steve,

I`ve been thinking about the exact same question and would prefer answers to your question instead of alternatives.... (e.g. get a CMHC insured mortgage)

One alternative I`ve come up with, is to provide my investors with a guaranteed return (e.g. 10% interest only per year, paid out in 2-5 years), however that is risky and assumes the property will appreciate, I`ll be able to refinance and pay them off... However, a bigger return for me.

I have no idea how to create a scenario like that though, and would really appreciate some feedback from someone who has gone this route. It may be similar to RRSP second mortgages, but these would be loans instead of 2nd mortgages...

Thoughts?

 

[Thomas Beyer]

QUOTE (SLBRealEstate @ Mar 12 2009, 08:48 PM)
...



If a duplex cost $200,000 - we put 20% down, therefore no CMHC....



Investor #1 puts in $10,000 = 20% of down payment

Investor #2 puts in $5,000 = 10% of down payment

Investor #3 puts in $15,000 = 30% of down payment

Investor #4 puts in $10,000 = 20% of down payment

Investor #5 puts in $10,000 = 20% of down payment

..


Only a legal person can own a property. That is either

a) a person, or

b) a company, or

c) tenants-in-common i.e. 2 or more people (not recommended with investors !!!!)



Thus, two options:

a) one person owns it legally.



b) a company owns it. The company may have class A voting shares (say 100, for the control person) and class B non-voting shares (say 100,000, one for each $ invested, for 50,000 and 50,000 for control person). Shares have NO value (or 0.0001 cents) .. Money comes in as a shareholder loan, $10,000 from person A and he gets 10,000 shares, $5,000 from investor B and he gets 5,000 shares ...)



There is a JV agreement in place (also called a USA, a unanimous shareholder agreement, in case of a company with shareholders) which is signed by all parties that regulates things such as cash in, cash-flow, exit options, cash-calls, risks, personal guarantees, who makes decisions to paint, rent, fix the roof, sell ..). This USA costs maybe $2500 to $5000 to set up, but once set up can be cloned for future ventures with minor modifications.



Benefits to a person owning is it is easier to get a mortgage usually and costs a bit less. Option b) is cleaner but slightly more costly to set-up and maintain annually.



Related post: http://myreinspace.com/search/rein_members_only/Members-Only_Discussion/81-9751-51632-Tax_Tip__Reasons_to_NOT_incorporate.html#51632



http://myreinspace.com/search/public_forums/General_Discussion/61-10037-52908-Anyone_have_a_sample_of_a_JV_Agreement_for_two_people.html#52908

 

[seanverret]

QUOTE (thomasbeyer2000 @ Mar 13 2009, 10:16 AM) Benefits to a person owning is it is easier to get a mortgage usually and costs a bit less. Option b) is cleaner but slightly more costly to set-up and maintain annually.

So can I do option a, in my name, and still pay my investors a fixed rate of return, versus having them JV partners? Or is the best way to do something like that in option b?

 

[Thomas Beyer]

QUOTE (seanverret @ Mar 13 2009, 11:39 AM) So can I do option a, in my name, and still pay my investors a fixed rate of return, versus having them JV partners? Or is the best way to do something like that in option b?
it is another option .. both with pro`s and con`s !!

What is better: beer or wine ? Hawaii or Jamaica ? Steak or fish ?

 

[SLBRealEstate]

The response has been great so far. There are a lot of good points.
I was hoping to pool to different investors as silent investors. We as the business
would take care of all property and management related issues.
This would definitely be spelled out in any contract.

I was trying to get up to the 20-25% down because there doesn`t seem be be
any properties in this area ( so far ) that cash flow when I factor in all costs.
This is assuming the 10% down, with CMHC.

I`ve been trying to get numerous properties to pass but wilth luck. This has lead to us trying to come up with a bigger down payment - hence more investors....etc.

Keep the ideas and conversations going - this is great information.

Thanks
Steve

 

[invst4profit]

Stop! You may be falling into the trap many new investors fall into. Step back and re-evaluate your situation.

If you can`t find properties that cash flow you probably need to look harder or look somewhere else.
Although some may suggest that no cash flow temporarily may be acceptable it makes your investment much riskier.
At the very least you should be following the REIN guidelines for evaluating potential properties.

Ultimately you have the same rental income and the same overall financial commitment regardless of how much is paid down to "force" cash flow so be careful.

Be very careful when speculating on appreciation.

 

[Thomas Beyer]

QUOTE (SLBRealEstate @ Mar 13 2009, 02:31 PM)
The response has been great so far. There are a lot of good points.

I was hoping to pool to different investors as silent investors. ...



I've been trying to get numerous properties to pass but wilth luck. This has lead to us trying to come up with a bigger down payment - hence more investors....etc.


some issues to be aware of are securities issues if you "pool investments". You are now selling securities and have to be careful about taking money from "strangers" !!



Your property MUST cash flow . (note: large PERIOD) with 20% down, 25 year amortization and 6% interest rate (even if amortization is longer and interest rate lower right now)



How many offers have you written ? 2 ? 12 ? over 20 ? if not .. try to look deeper and harder and write more offers !



Check this posts here on how to get started and JV issues:



How to get started http://myreinspace.com/public_forums/General_Discussion/61-4391-How_to_get_started_.html



50/50 ` is this fair ?

http://myreinspace.com/public_forums/Real_Estate_Discussion/62-2015-5050__is_this_fair_.html

 

[housingrental]

Steve - If you don`t have extensive experience in successfully owning and managing the particular property type is it reasonable for you to be structuring a JV where you get a large equity stake without putting money in? What if its unprofitable once owned, and could have been if you had the experience ?

Not to single out you - I take issue with others who market this too - but is it even ethical for an investor to represent themselves as an expert and sell someone on this idea when they`re not? I`ve not seen this addressed before - Does anyone else share my thoughts on this? It`s one thing when you can say I`ve done this exact same thing with success X times but I consider this different...

 

[housingrental]

Also what properties did you flip ? If in KW address`s ?

 

[surfermoe]

Steve, my wife and I just bought our first property, and we were in the same situation as you before taking a different perspective on things. For every property we looked at the numbers just didn`t work. Then we shifted our focus away from the established (i.e. expensive) areas of our city, and looked on the periphery of those areas. We`ve found it easier to find properties that cash-flow there (although it still take a lot of digging).

Moe

 

[Nir]

Steve, you got excellent advice here. wanted to add:
- what a mess/joke! 8 investors owning a 200K property

A. let`s be realistic you simply can not make it happen! B. it does not make sense as you can not make money this way.
- As Todor and others mentioned you should put as minimum down as possible and buy FOR YOURSELF as much as you can before complicating things involving others!
Also, do the math, I don`t understand your logic - with 10% down the property does not cash flow and you think with 20% down PLUS all the expenses related to JV the property will suddenly cash flow? what will it be $8/month/investor? BigMac & fries, water no ice.
- I don`t buy properties that don`t cash flow with 0% down (does not mean I put 0 down). in other words as Thomas mentioned look harder, there are M-U-C-H better deals out there.
- Don`t JV too early. first buy as many cash flow properties for YOURSELF as you can then start complicating your life with friends.
GL!
ps. when you no longer have cash for down payment, then JV. but not 8 investors on a 200K property and not too early. It`s like throwing one bone at 10 hungry dogs.

 

[housingrental]

Steve - Any thoughts on my post ?

 

[Mike Milovick]

QUOTE (investmart @ Mar 16 2009, 08:38 AM) Steve, you got excellent advice here. wanted to add:
- what a mess/joke! 8 investors owning a 200K property

A. let`s be realistic you simply can not make it happen! B. it does not make sense as you can not make money this way.
- As Todor and others mentioned you should put as minimum down as possible and buy FOR YOURSELF as much as you can before complicating things involving others!
Also, do the math, I don`t understand your logic - with 10% down the property does not cash flow and you think with 20% down PLUS all the expenses related to JV the property will suddenly cash flow? what will it be $8/month/investor? BigMac & fries, water no ice.
- I don`t buy properties that don`t cash flow with 0% down (does not mean I put 0 down). in other words as Thomas mentioned look harder, there are M-U-C-H better deals out there.
- Don`t JV too early. first buy as many cash flow properties for YOURSELF as you can then start complicating your life with friends.
GL!
ps. when you no longer have cash for down payment, then JV. but not 8 investors on a 200K property and not too early. It`s like throwing one bone at 10 hungry dogs.


LOL. Water, no ice. Hahahahahaha

 

[Mike Milovick]

QUOTE (thomasbeyer2000 @ Mar 13 2009, 12:16 PM) Only a legal person can own a property. That is either
a) a person, or
b) a company, or
c) tenants-in-common i.e. 2 or more people (not recommended with investors !!!!)

Thus, two options:
a) one person owns it legally.

b) a company owns it. The company may have class A voting shares (say 100, for the control person) and class B non-voting shares (say 100,000, one for each $ invested, for 50,000 and 50,000 for control person). Shares have NO value (or 0.0001 cents) .. Money comes in as a shareholder loan, $10,000 from person A and he gets 10,000 shares, $5,000 from investor B and he gets 5,000 shares ...)

I would disagree. Option C would probably be the way to go. I`m not sure if having 8+ partners would be prudent on a $200,000 property, but the way joint tenancy works is that each "tenant in common" (think owner) may sell his or her interest. If the investors have different levels of investment/ownership into the project, this would be the way to go.

Failing that, you could probably also have a person own it legally, with trust agreements for the partners. A banker/lawyer could probably advise on ramifications from mortgaging/legal perspective.



Mike

 

[Thomas Beyer]

QUOTE (investmart @ Mar 16 2009, 06:38 AM) Steve, you got excellent advice here. wanted to add:
- what a mess/joke! 8 investors owning a 200K property

A. let`s be realistic you simply can not make it happen! B. it does not make sense as you can not make money this way.
- As Todor and others mentioned you should put as minimum down as possible and buy FOR YOURSELF as much as you can before complicating things involving others!
Also, do the math, I don`t understand your logic - with 10% down the property does not cash flow and you think with 20% down PLUS all the expenses related to JV the property will suddenly cash flow? what will it be $8/month/investor? BigMac & fries, water no ice.
- I don`t buy properties that don`t cash flow with 0% down (does not mean I put 0 down). in other words as Thomas mentioned look harder, there are M-U-C-H better deals out there.
- Don`t JV too early. first buy as many cash flow properties for YOURSELF as you can then start complicating your life with friends.
GL!
ps. when you no longer have cash for down payment, then JV. but not 8 investors on a 200K property and not too early. It`s like throwing one bone at 10 hungry dogs.
good advice here !!

 

[SLBRealEstate]

Hello all. I just read through the last few posts this week - I just returned from a March break vacation.

Hey Adam - you are correct, in the expertise and knowledge required. When I mentioned we would take care
of management, I meant that our business would contract this portion out to a trusted property
management firm. We are more interested in searching and finding potential properties and doing the initial
work required to get them ready.
As far as the silent investors were concerned, our thoughts were towards friends that might be interested
not total strangers. Each person would know the risks involved.
The couple of properties we did flip were in the Kitchener. We learned a lot. They were single family houses.
The first was a 3 bedroom semi. The second was a 4 bedroom home we converted back to a 3 bedroom house with
a much larger master. Each home was a 2 month reno ( no permits required )
I see you have a property management company in Waterloo. Maybe I could get some more info
from you regarding your consulting services, etc.

Has anybody else online here bought in the KW area that would be able to show me some REAL numbers
that work as 10% down examples. Maybe I am doing something wrong and/or I just don`t
have enough information on rental prices. I look at listings each week to try and get a sense of average
rents. ( maybe this would be part of your consulting services Adam, I don`t know )


Steve