40k Flips
Quick Start Notes: Steps to Raise Capital for Equity Partnerships
MIND MAPS:
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“If you chase 2 rabbits you will catch neither”
My View of Real Estate “Funding = Freedom”
(This is my Rabbit)
The Pancreatic Cancer Case Study
1467 Sunny Acres
w/ none of my own
cash or credit
Purchase Price $53,500 / One week prior to my surgery
Improvements $21,000
Private Money $79,000
Cash Back at Closing $25,500
Acquisition fee $4,500 – I collected this up front
Sold $124,900 April 2012
Gross Profit $50,500
Net Profit $35,200 + 4,000 Acquisition Fee
(all completed while recovering from Pancreatic Cancer)
First Private Lender I Ever Got And I Had NO JOB, $15k Credit Card Debt and ZERO EXPERIENCE
Unsecured Note
1st Note I ever did in spring 2004 (non IRA)
· 60k Loan / Note
· 18% Interest / paid annually
· 5 Yr. Note
2nd note I ever did (IRA)
· Interest Paid annually
o $10,800 due in June every year
o 90k
§ 10%
§ 5 Yr. Balloon
§ Unsecured
· No Mortgage
· No Security
What Are Your Goals?
· Rehab, Fix & Sell
· 3-4 Months
o Buy, Fix & Sell
o Buy, Less than 5-10k improvements, resell
· 6+ Months (BIG Projects)
o Buy, Fix & Sell
o Here’s the Thinking
· 30-60 Days
o Big Improvements
· 45 Days to Close
o Once a Buyer is Under Contract
· Back to Back Closing?
· Rental?
o 3-5 Year Partnership
· Tax Lien
o 6 Month Redemption
o 1-3 Years
§ Option 1=18-24%
· Guaranteed
§ Option 2=I Get a House Free & Clear
Disclaimer / Disclosure
I am not an attorney….although I used to play one on T.V.
I am not a financial planner anymore….although I used to be from 1998 to 2005….
I am not an accountant and have NEVER EVER wanted to be….
Everything I say today is for informational purposes only
Q. What is a Private Money Partner?
A. Someone / Anyone who has cash who partners/ invests or loans to you / with you! Assets Can Include Savings, Checking, CD’s, Brokerage Accts, Liquidated Mutual Funds, Stocks, Bonds, Retirement Accts, Health Savings Accts, Lines of Credit,
Q. Why Do Private Money Partners Give Real Estate Investors Money To Do Deals?
A. Because The Investment Alternatives Suck and The Returns are Better in Real Estate….AND they like and trust you.
Let me explain……
CD Rates: 1% Return on Investment
Annuity Rates: 4% Return on Investment
Bond Rates: 3.85% Return on Investment
Compensation Drives Behavior
S&P 500: Last 5 Years = ONLY 7.2% per year
S&P 500: Last 10 Years: 6.71% Return on Investment
Precious Metals
$500,000 Mutual Fund Investment
American Funds = Small Cap World
Exp ratio = %1.09 (paid to the fund manager)
· @ 10% = $50,000 Profit / ROI
· @ 8.91% = $44,550 Profit / ROI
“A” Share Commission
· (paid to the financial advisor who sells this mutual fund to their client)
· $500,000 = 2% (breakpoint) = $10,000
$500,000 - $10,000 = $490,000 - $5,341 (%1.09 exp ratio) = $484,659 left (zero ROI)
$15,341 dollars in FEES for American Funds
$1,500 dollars in FEES for Equity Trust (self-directed IRA)
Share Classes
Class “A” Shares – up front commission
Class “B” Shares – back end commission & higher expense ratio
Class “C” Shares – small annual commission & highest expense ratio
“LOAD” / “NO LOAD”
Load = Commission
No Load Fund = No Commissions
Paying a money manager = charge a money management fee
· EX: Sell no load funds BUT charge 1% money management fee + 1% expense ratio
Variable Annuities
Act Very Similar A Mutual Fund
BUT
Access To 40 Funds Within The Annuity
Transfer From Fund To Fund With No Expense
3% Commission Up Front &
2% Exp Ratio Per Year Every Year
SUMMARY: If you were a private investor with an OLD 401k, where would you rather invest?
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OPTION “A” = NOT US
CD = 1%
Annuities = 4% or less
Bonds = 4% or less
Stock Market past 5 yrs.= 7.2%
Stock Market past 10 yrs. = 6.71%
Significant Volatility
No Control over Investments
THE WEALTHY DON’T DO OPTION “A”
OPTION “B” = US
We pay 12% minimum
Or
15% of profit
Whichever is greater?
Predictable
Control over investments you can see and touch
THE WEALTHY DO OPTION “B”
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Favorite Source of Funding for $40k Flips?
A Self Directed IRA is an Individual Retirement Account where the owner funds real estate deals.
We get the funding for our $40k Flips from IRA’s.
Sample Investments
· Note (I.O.U) w/ Mortgage
· Fraction Deeds
· Invest in Stock Companies BUT NOT S-corps
3 Step Process
Set Up A IRA Acct = iPlan Group (Acct Application Form)
Fund The Acct = (Rollover / Transfer Form)
· Rollover = from 401k or 203b
· Transfer = from another IRA
Make An Investment (Direction of Investment Form)
· Copies of Note and Mortgage
Note and Mortgage
What is a Note?
· I Owe You
o Who is the Borrower
o Who is the Lender
o What is the Interest Rate
o When is the Interest Due and Payable
§ Monthly
§ Quarterly
§ Annually
o Payback
§ 1 Year / 3 Year / 5 Year
§ Amortized / Balloon??
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Notary
Mortgages
· Do have to be notarized
Notes
· Do NOT have to be notarized
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CASE STUDY
3954 Homestead Rd
Ravenna, OH
Purchase Price $41,500
Private Money Partner Funding $79,000
Self Directed IRA
Cash Back at Closing $37,500
ACQUISITION FEE $3,400 PAID TO ME WHEN I BOUGHT IT
None Of My Own Cash or Credit
Actual Sold Price $121,000
Profit $44,000
Closing October 15th 2013
This is exactly what it looks like
to sell a house for HUGE PROFITS!
April 24th 2013 at 4:54 pm
Securities Dealers?
We are not securities dealers!
What is and is not a security?
Q. If you are dealing with a security / what disclosures or documents do you have to file to be compliant?
A. Private Placement Memorandum
Securities Dealers
Federal Rules
Securities Act of 1933
Securities Act of 1934
· Reg D
o Rule 504
o Rule 505
o Rule 506
Securities Dealers
State Rules Ohio
“Blue Sky Laws”
Real Estate is NOT a Security (exempt)
Notes and Mortgages are NOT securities (exempt)
Tax Liens are NOT a Security (exempt)
Partnerships & Businesses & JV’s are NOT Securities (exempt)
What Is & Is Not a Security
WHOLE Notes & Mortgages are NOT Securities
· They are EXEMPT
Fractional Note IS a Security
· I do not personally do these
· *Anthony Geraci, Esq
Three Ways
LOANS
· Notes & Mortgage
o 12% Int. or 15% of Profit
§ ~Whichever is greater~
o I do not pay them anything monthly or quarterly
o Investor gets paid when house sells ~OR~
§ Balloon Payment
· 1 yr.
Loans (notes) from Investors to Your LLC
· Benefits
o You own the property 100%
o You make all the decisions
o The Lender is “The Bank”
· Disadvantages
o You are REQUIRED to fulfill on the promise you made on the NOTE (I Owe You)
o You Pay or They Foreclose!
JV PARTNERSHIP
· Fractional Deed for ownership
· Join Venture Agreement for decision making
· Benefits
o No Lender Liability
§ They bring in the money and they are co-owners so they have the downside
LLC CO-OWNERSHIP
· 50/50 Partner in the units of the LLC
o Can split profits 80/20 or 70/30 or whatever you agree to
· Benefits
o No Lender Liability
o They bring in the money and they are co-owners so they have the downside
Raising Money
People that I have a prior existing relationship
· Equity Partnership
o Business
§ LLC
§ Partner On Deals
§ Chuck Finds the Deals
§ Jimmy Puts Up the Money
§ Joint Venture
§ Does NOT need Registered
o Converting a Stranger to a Private Money partner?
o What is a “Prior Existing Relationship?”
§ There is no True Definition BUT the Standard is “3 Touches & 30 Days”
§ Needed in order to make someone an offer
From the public / strangers or people we do not have a prior existing relationship
· Create a Prior Existing Relationship
o “Education Based Selling” them thru the Cap Raise PPT
o Teach about the market and options
o Peel Back the Onion and remove their other options
o Teach about my deals
o Teach about sample deals / give them examples
o WITHOUT making them an offer / asking to fund a deal
§ Exclusion Mentality:
§ “Do You Know Anyone Who May Be Interested In Learning More About This or Doing This With Me?”
· Start with this concept…..The “Equity Partnership”
o Business
§ LLC
§ Partner On Deals
§ Chuck Finds the Deals
§ I Put Up the Money
§ Joint Venture
§ Does NOT need Registered
§ Must Advertise Partnerships / Joint Ventures / Stock in LLC
ROI Expected
· Rehab, Fix and Flip
o 10-22%
§ 2 Points Up Front PLUS 1 Point per Month
§ 12% or 15% of Profit – Whichever is Greater
· Back to Back Closing
o 2 Pts.
o $2500
o Whichever is Greater
· Rental
· 7-11%
· Single Family
· Monthly Payments
· (must commit)
· Tax Liens
· 6-24 Months
· 7-11%
· 30-90 Day Money
o 22-25%
o Toughest Money to Get
§ From a private money lender or a hard money lender
§ Too much hassle regardless of ROI
o Buy it, Put it Right Back on the Market in its as-is Condition OR with less than $10k improvements
o Short Sales Where we Get an Incredible Discount
§ House Needs Little Work
§ EX: 3331 Marmore, Wakehurst,
Example: ROI Expected
· Buy $200k
· Repairs, Ins, Utilities, Mrktg, etc. $50k
· Sell $350k
· Loan $250k
o 25%
§ $62,500
§ Close in 90 Days
§ Divide by 4
· = the amount they need to earn over 90 days to get to an annualized return
· $15,625
· Gross Profit
o $100k
· Closing Costs
o 10% of the Sales Price
§ Rule of Thumb
o $35,000
§ 3% Buyers Agent
· Title
· Property Taxes
· Title Insurance
· Closing Fees
§ 3% Seller Concessions
§ 1% Misc.
· $600
· Adjusted Gross
o $70k
§ Before Private Lender Interest
· Net
o $70,000 - $15,000
o $55,000
Sweet Spot
· Easy Money
o $50k - $500k
o 35 – 55 Year Olds
o OLD 401k, OLD IRA $
§ “Regular Guy”
§ Medical Sales
§ Police / Fire
§ Banker / Brokers
§ Engineers
§ Managers / Ops Mgrs.
§ Steel Worker
§ “Average Joe”
· Tough Crowd
o $1,000,000 in assets +
o Clients are Married to their Financial Advisors
§ Stock Broker
§ Financial Planner
§ Attorney
· Special Treatment
o Access to private money managers who $1M < don’t have access
§ Little Old Lady/Man
· 70 + Years Old
o All They Tend to Care About is Security
o 1-2% is just fine with them
§ Son or Daughter
· Manages Their Money
· The Last Thing Your Son or Daughter is Going to do is put Their Momma’s Money at Risk
§ Test
· They Will Test You with Small Money
· $1M Client Gives $80k
Case Study #14
1297 Steve Dr.
Akron, OH
Bought June 2013
Bank foreclosure
Paid $50,500
Improvements $36,000
Private Money $90,000
Funded by private lender via Self Directed IRA
CASH BACK AT CLOSING $39,500
ACQUISITION FEE $4,000 PAID TO ME WHEN I BOUGHT IT
Just Listed $149,000
Gross Profit Potential $63,400
Net Profit Goal $40,000
Professional Financial Advisors / Investment Managers
· “Selling Away”
o Cannot Sell Financial Products / Instruments That Their Broker Dealer hasn’t Endorsed / Registered
o 22 Page Affidavit Every year
· Securities Dealers
o These are not Sources of Leads because They Cannot “Sell Away”
IPlan Group
Erika Kelly
(440) 484.5566
Free 30 Minute Strategy Session
http://signup.iplangroup.com/srecnow
Jill Banner, Found and CEO
Erika Kelly, Client Relationship Manager
(She’s Here at HUD Summit)
Kayla Stone, Client Relationship Manager
Q&A
Investing with IRA’s?
Consequences of DOING IT WRONG
There are possible severe consequences for you as the owner of the retirement account and for the other person(s) who participate in a prohibited transaction, including:
The investment being treated as a distribution, which may trigger a taxable event
An early distribution penalty of 10% if you are under the age of 59½ A 10 percent penalty for early distribution
You may incur a 15% excise tax on the amount involved in the prohibited transaction
You may be subject to additional penalties which can accrue for under-reporting for the years before the IRS discovers the prohibited transaction
Action Plan:
Make 2 Lists
· #1 List of People You Already Know
o Project 100: Discover Your Sphere
§ They can Refer
§ They can Cheerlead
§ They can Lend
· #2 List of Places You Can go Meet More Potential Partners
o Golf Courses – Country Clubs
o Chamber of Commerce
o REIA Clubs
o Kiwanis
o Hondros
o Kids Soccer Games
o Kids Basketball Games
· Elevator
· Hey Josh What Do You Do?
· “Well, I Raise Capital for Real Estate!”
· My Favorite
· “I raise money for real estate deals. I raise money from private investors, I buy foreclosures and pay my investors a fixed double digit rate of return.”
· “I own a bunch of real estate businesses and I raise capital to fund projects. I work with investors and pay them a fixed double digit rate of return.”
Elevator
· Elevator Pitch
o BECAUSE ITS SUPER SEXY!!!!!!
· They Typical Response is:
o Oh that’s great I’ve always wanted to buy a rental