Author Topic: Group RE investing  (Read 1003 times)

Adam Zapple

  • Bristles
  • ***
  • Posts: 463
Group RE investing
« on: March 26, 2018, 05:43:12 AM »
Hi Everyone,

My latest investment scheme involves gathering a group of 3-5 investors and pooling our money to pay cash for investment properties.  My idea is to buy one every year for the next six years.  At that point, I would be open to leveraging a bit to purchase several more properties or larger/commercial properties.  Has anyone else been involved in something similar?  My reasons for wanting to pay cash mostly revolves around a soon approaching FIRE date (approximately 6 years) and wanting immediate cash flow with limited risk.  I do not want a market downturn to derail my FIRE plan so I think owning the properties outright will be a good hedge.  I also think eliminating a lot of the risks involved in purchasing my first investment property (by paying cash) will help me actually pull the trigger.

Tell me why this is a stupid. 

MommyCake

  • Stubble
  • **
  • Posts: 193
  • Location: NJ
Re: Group RE investing
« Reply #1 on: March 26, 2018, 05:57:40 AM »
I'm really interested to see what the more experienced people have to say.  I'm not sure what benefits you will have from paying cash.  I can only think of the negatives involved in partnering up, such as having to share profit, not being able to make decisions independently, having to trust people, etc.

I bought a property in 2007 that is currently worth about 100k less than what I owe on it.  Similar to how I don't care when the stock market is down because I still own the same number of shares, I don't care that the value of the house has depreciated so much because my mortgage payment is the same (except for annual tax increases) regardless of value, and the rental income increases annually.   Is this a naive way of thinking?  If I paid cash would I be better off?


thepuglife

  • 5 O'Clock Shadow
  • *
  • Posts: 21
Re: Group RE investing
« Reply #2 on: March 27, 2018, 11:49:23 AM »
I have not done this myself but one of my properties is next door to a similar multi unit that was purchased by a group of three investors. There has been a lot of trouble. A realtor who has represented them told me that the partners argue about maintenance costs, etc. Also, their building has now been for sale for about two years. They have received multiple offers over the asking price but one of the group refuses to accept any of the offers because he thinks they should get more. If you want to proceed with your plan, you should think about how to structure your co-ownership agreements to avoid these kinds of hassles.

jwright

  • Bristles
  • ***
  • Posts: 267
Re: Group RE investing
« Reply #3 on: March 27, 2018, 12:53:27 PM »
We enter into larger investment deals through my work in groups.   There are a lot of different ways to structure those deals.  My best advice to is to make sure you have an operating agreement in writing as well as proforma financial statements that can estimate how the property will perform and also where the funds will go.  We usually also show a proforma distribution schedule. 

I think interest rates are still low enough that leveraging debt can be a great catalyst to growing wealth.  It all depends on the financials of your property though. 

I will say, I don't think I would bring on partners on a small residential deal; it's just not worth the headache. 

FINate

  • Handlebar Stache
  • *****
  • Posts: 1463
Re: Group RE investing
« Reply #4 on: March 27, 2018, 01:11:32 PM »
Not sure why you believe paying cash and owning outright will protect you in a downturn. If you want to own real estate then buy real estate... doesn't matter if all cash or mortgaged, either way you assume the risks and costs of being the owner of an illiquid asset. Be prepared to potentially hold onto it long term, 10 years or longer, if your locale takes a dip. And be okay with the risk that prices never recover (it happens). Adding a partnership into this increases the risk with zero benefit. Occasionally I see listings on Zillow for people trying to sell their 20% holding in a property... these don't sell. Who the hell wants to buy into such an arrangement? So you're literally making an already illiquid asset even less liquid.

Besides, what you're proposing is like a crappy REIT. Why not just invest in a REIT if you want to pool with other investors?
« Last Edit: March 27, 2018, 01:13:27 PM by FINate »

Adam Zapple

  • Bristles
  • ***
  • Posts: 463
Re: Group RE investing
« Reply #5 on: March 28, 2018, 06:59:50 AM »
I appreciate the feedback and constructive criticism.  This is just an idea I've been kicking around.  I have wanted to diversify my portfolio with some tangible assets for quite some time.  I have a background in construction so feel like my skills would be put to good use in the right investment properties...just trying to figure out the best way to go about it.  I should clarify that I have a few friends/acquaintances who are also interested in real estate and, like me, have backgrounds in construction.  They would be investors and assist with any property rehab, if needed.

Not sure why you believe paying cash and owning outright will protect you in a downturn. If you want to own real estate then buy real estate... doesn't matter if all cash or mortgaged, either way you assume the risks and costs of being the owner of an illiquid asset. Be prepared to potentially hold onto it long term, 10 years or longer, if your locale takes a dip. And be okay with the risk that prices never recover (it happens). Adding a partnership into this increases the risk with zero benefit. Occasionally I see listings on Zillow for people trying to sell their 20% holding in a property... these don't sell. Who the hell wants to buy into such an arrangement? So you're literally making an already illiquid asset even less liquid.

Besides, what you're proposing is like a crappy REIT. Why not just invest in a REIT if you want to pool with other investors?

Your points are well taken.  in my mind, the benefit of an all cash deal is the immediate cashflow as well as the ability to jump on great deals as they present themselves.  Instead of partnering with the bank, I am partnering with other investors.  Obvious downside is giving up equity.  Upside is immediate cashflow and shared responsibility for the work involved.  This arrangement also protects me from having to outlay cash for mortgage payments if the property does not rent for an extended period or if rents dip in the area.  Your point about liquidity is a good one and something I'd have to put some thought into.  An exit plan would definitely need to be considered prior to purchasing anything and written into a contract between investors.  Getting 3-5 people to agree might prove difficult. 

Unlike a REIT, I would have direct control over the property and can directly influence my returns (which can be seen as a positive or negative depending on perspective.)  This appeals to me.  I don't feel like REITs provide the downside protection that physical real estate holdings provide.  There can be a benefit to lack of liquidity when it comes to a drastic market downturn.

We enter into larger investment deals through my work in groups.   There are a lot of different ways to structure those deals.  My best advice to is to make sure you have an operating agreement in writing as well as proforma financial statements that can estimate how the property will perform and also where the funds will go.  We usually also show a proforma distribution schedule. 

I think interest rates are still low enough that leveraging debt can be a great catalyst to growing wealth.  It all depends on the financials of your property though. 

I will say, I don't think I would bring on partners on a small residential deal; it's just not worth the headache. 


Thanks for the experienced insight.  Unfortunately, I live in a HCOL area so smaller residential deals are the only thing I would be able to afford at the moment.  I appreciate the power of leverage but am growing less risk averse as I get older and my family grows.     

I have not done this myself but one of my properties is next door to a similar multi unit that was purchased by a group of three investors. There has been a lot of trouble. A realtor who has represented them told me that the partners argue about maintenance costs, etc. Also, their building has now been for sale for about two years. They have received multiple offers over the asking price but one of the group refuses to accept any of the offers because he thinks they should get more. If you want to proceed with your plan, you should think about how to structure your co-ownership agreements to avoid these kinds of hassles.

I think what Jwright suggested would help to alleviate these types of problems but can appreciate how life circumstances can get in the way of even the best laid out business arrangements.

I am open to any other discussion that may change my way of thinking.

FINate

  • Handlebar Stache
  • *****
  • Posts: 1463
Re: Group RE investing
« Reply #6 on: March 28, 2018, 10:27:47 AM »
Your points are well taken.  in my mind, the benefit of an all cash deal is the immediate cashflow as well as the ability to jump on great deals as they present themselves.  Instead of partnering with the bank, I am partnering with other investors.  Obvious downside is giving up equity.  Upside is immediate cashflow and shared responsibility for the work involved.  This arrangement also protects me from having to outlay cash for mortgage payments if the property does not rent for an extended period or if rents dip in the area.  Your point about liquidity is a good one and something I'd have to put some thought into.  An exit plan would definitely need to be considered prior to purchasing anything and written into a contract between investors.  Getting 3-5 people to agree might prove difficult. 

If you can't get to immediate cashflow positive in your area with a mortgage then RE is overpriced. Walk away and invest in something else. You have to remember that you're tying up a very large amount of capital - it must yield sufficient returns or it's simply not worth the risk. And the risk is very real - you will sink a significant percentage of your net worth in a depreciating structure with high fixed costs (taxes, maintenance) with the hope that the overall property appreciation (land/permits) and rental income overcome this. The more you put down, the more it must yield to be worth it. And a stretch of low rental income will impact your FIRE plans just as much as a dip in the markets. Mortgage rates are still super low and the interest is deductible from the rental income.

IMO partnering with a bank is easier than partnering with N other investors. The investors, rightfully, are going to want a say in decisions. Where to buy, what type of property, which specific properties,  how much to offer, etc. Don't for a minute think that people are going to invest in this thing and defer to you to call the shots, doesn't work that way. In the end you will move more slowly compared to just you and a bank. Same problem with sharing work responsibilities... you can't fire an investor so resign yourself to potentially doing all the work and others freeloading. At least make sure that your initial agreement provides for management fees or similar pay for those actually doing the work, and stipulate how this pay and assignments are determined (vote of the board or whatever).

I'm skeptical by nature, which is why I'm replying to your thread asking for skeptical POVs ;-) I worry you've been bitten by the RE bug. Perhaps you've seen huge property appreciation in your area and/or friends/family who are sitting pretty with their the RE investments, and you're looking to get in on the action. This is not meant to be a personal attack, but I worry because it almost never ends well. And yes, I could be wrong here, but the fact that you've omitted all comparisons to other investment options suggests this is the case. I think you have to seriously consider if your desire for RE is causing you to underestimate the downsides and overestimate the upsides.

I should disclose that I have rental property, but I bought it during the housing bust and got a great deal. The time to buy RE is when everyone is doom-and gloom. Lots of articles about how it's better to rent than own in those days (anyone remember all the "smart" hipsters saying this back then?). It has appreciated a lot and rent income has increased as well, so it's paying off for us. But I'm still somewhat ambivalent about it...it's not doing any better than my other investments. In fact, we are looking to reduce our RE holdings in the near term. When I see people (not you necessarily, but in the wider world) desperately trying to get into RE by whatever means possible, and at almost any price well, let's just say my spidey sense is tingling.

Adam Zapple

  • Bristles
  • ***
  • Posts: 463
Re: Group RE investing
« Reply #7 on: March 28, 2018, 02:39:28 PM »
Your points are well taken.  in my mind, the benefit of an all cash deal is the immediate cashflow as well as the ability to jump on great deals as they present themselves.  Instead of partnering with the bank, I am partnering with other investors.  Obvious downside is giving up equity.  Upside is immediate cashflow and shared responsibility for the work involved.  This arrangement also protects me from having to outlay cash for mortgage payments if the property does not rent for an extended period or if rents dip in the area.  Your point about liquidity is a good one and something I'd have to put some thought into.  An exit plan would definitely need to be considered prior to purchasing anything and written into a contract between investors.  Getting 3-5 people to agree might prove difficult. 

If you can't get to immediate cashflow positive in your area with a mortgage then RE is overpriced. Walk away and invest in something else. You have to remember that you're tying up a very large amount of capital - it must yield sufficient returns or it's simply not worth the risk. And the risk is very real - you will sink a significant percentage of your net worth in a depreciating structure with high fixed costs (taxes, maintenance) with the hope that the overall property appreciation (land/permits) and rental income overcome this. The more you put down, the more it must yield to be worth it. And a stretch of low rental income will impact your FIRE plans just as much as a dip in the markets. Mortgage rates are still super low and the interest is deductible from the rental income.

IMO partnering with a bank is easier than partnering with N other investors. The investors, rightfully, are going to want a say in decisions. Where to buy, what type of property, which specific properties,  how much to offer, etc. Don't for a minute think that people are going to invest in this thing and defer to you to call the shots, doesn't work that way. In the end you will move more slowly compared to just you and a bank. Same problem with sharing work responsibilities... you can't fire an investor so resign yourself to potentially doing all the work and others freeloading. At least make sure that your initial agreement provides for management fees or similar pay for those actually doing the work, and stipulate how this pay and assignments are determined (vote of the board or whatever).

I'm skeptical by nature, which is why I'm replying to your thread asking for skeptical POVs ;-) I worry you've been bitten by the RE bug. Perhaps you've seen huge property appreciation in your area and/or friends/family who are sitting pretty with their the RE investments, and you're looking to get in on the action. This is not meant to be a personal attack, but I worry because it almost never ends well. And yes, I could be wrong here, but the fact that you've omitted all comparisons to other investment options suggests this is the case. I think you have to seriously consider if your desire for RE is causing you to underestimate the downsides and overestimate the upsides.

I should disclose that I have rental property, but I bought it during the housing bust and got a great deal. The time to buy RE is when everyone is doom-and gloom. Lots of articles about how it's better to rent than own in those days (anyone remember all the "smart" hipsters saying this back then?). It has appreciated a lot and rent income has increased as well, so it's paying off for us. But I'm still somewhat ambivalent about it...it's not doing any better than my other investments. In fact, we are looking to reduce our RE holdings in the near term. When I see people (not you necessarily, but in the wider world) desperately trying to get into RE by whatever means possible, and at almost any price well, let's just say my spidey sense is tingling.

Thank you for the insight.  I like hearing from those who actually own investment properties.  You are correct that housing is overpriced where I live (NYC suburb).  I've analyzed dozens of properties and only found one or two that seemed to make any financial sense.  I have spent some time today crunching numbers and realized the monthly rent would have to be about 1.5% (roughly) of the purchase price to match historical returns of the stock market in an all cash deal.  Near impossible in my area.  Gotta rethink this.   

thepuglife

  • 5 O'Clock Shadow
  • *
  • Posts: 21
Re: Group RE investing
« Reply #8 on: March 28, 2018, 08:46:22 PM »
This is probably going to sound very odd, but I was in this situation with my ex husband in 2004 -- very HCOL area (San Francisco) and we were trying to make the numbers work on smaller multi units. After looking at dozens of properties, we found a formula that worked for us: properties in neighborhoods with great amenities (transit, shopping, restaurants) next to blight. We bought next to public housing projects and a freeway overpass. Strangely, it has worked out beautifully. Tenants love to live there because they do not need cars. Plus, the blight does not seem to bother them because they don't own the apartments. I visited one unit last weekend for some maintenance and one of the tenants told me he has been so happy there he never wants to move. Go figure. We got a huge discount on the buildings and have been able to fix them up so they are in very good condition.

calimom

  • Handlebar Stache
  • *****
  • Posts: 1010
  • Location: Northern California
Re: Group RE investing
« Reply #9 on: March 29, 2018, 08:03:10 PM »
Some years back, a relative of mine, along with her then husband, purchased a nondescript apartment complex in Southern California with a group of investors. Each party put in $50K and there was a mortgage. I believe an LLC was created. Fast forward to now, she receives about $1700 monthly; there has always been cash-flow. It's a very hands off investment with a property manager, and the current investors have a Go To Meeting every quarter. I think they used to meet in person but the investors are scattered about. It seems like a win for all. Some investors have sold shares, others have bought in. They do keep the property well maintained.

I am a small scale RE investor and bought a duplex in a distress sale along with cousin and her husband about 7 years ago. We've definitely put in some sweat equity and had a hiccup or two with tenants but this has been a solid investment. We self manage and divide tasks and each year have a check in on a specific date where we ask each other if this is still working. If it is, we stay the course. If for any reason it's not working for either party, one can buy the other out or it can go on the market. So far it's worked out well for us. We have also done 2 flips and made decent profits from both.

I love real estate! It can work to round out your portfolio, or be a major part of it.

jwright

  • Bristles
  • ***
  • Posts: 267
Re: Group RE investing
« Reply #10 on: April 02, 2018, 08:27:16 AM »
We usually have passive and active participation in our investment groups.

The limited partner group will get their pro-rata share of 80% of the LLC; then the remaining 20% (the "promote") is divided amongst the one or two developer groups who act as the general partner(s) who are responsible for sourcing the deal, construction oversight, leasing, management, etc.  The GP reports to LP monthly or quarterly depending on the nature of the investment.