It starts with our system giving us a “Green” light or a “Red“ light based on 4 values of the property:
- After Repair Value (ARV)
- Rehab Cost (Rehab)
- Length of Rehab (months)
- Market Rent (rent)
We first calculate the maximum purchase price for the property based on the following equation:
- Maximum Purchase Price = (ARV – Rehab) x 70%
Example: for a property with an ARV of $100,000 and rehab costs of $15,000, the maximum purchase price would be ($100,000 – $15,000) x 70% = $59,5000. The property also has to have a rent to ARV ratio of at least 1.3% ($100,000 ARV must rent for at least $1,300 per month). We are finding properties in the Midwest and South all day long that meet these criteria. They are in C-class areas, which are our preferences due to the ability to hold their rent amounts during a bad economy. Once we have the two “Green” lights for both the flip and the buy and hold, we do our due diligence to verify the assumptions and use very specific processes that manage our risk for flipping a property (over estimating ARV and underestimating the Rehab costs and timeframe).
3 Interconnected Companies
The Finance Company: We create a single-purpose LLC for each real estate deal, which becomes the Finance Company for that real estate deal, through which investors can become members. Help Keep My Money LLC is the Managing Member of the LLC and retains 1% ownership of the LLC. The remaining ownership interest (called Members’ Interest Units) is owned by investors based on how much capital they contribute to the LLC (which determines how many Members’ Interest Units they own). There is a maximum number of members that can contribute the any single LLC based on the amount that needs to be raised and a minimum investment amount of $101 (100 Members’ Interest Units).
The finance company will determine the best method for funding the real estate deal using one of two methods (or a combination of the two):
- It will issue a 1st mortgage loan (30-year fixed amortized assumable loan at a 10% annual rate with 4 points upfront at 70% LTV of the purchase price) and a 2nd mortgage loan (30-year fixed interest-only assumable loan at a 12% annual rate with 4 points upfront that covers the remaining down payment, the closing costs on the purchase, and the rehab costs) to the Flip Company (the borrower).
- It will use a loan from a 3rd party company to cover the purchase and possibly part (or all) of the rehab and closing costs.
The Flip Company: Our Flip Company uses 100% financing for the purchase, rehab and closing costs (through the financing from the Finance Company), so it winds up covering upfront out of pocket costs (inspection and appraisal), points on the 2nd mortgage and 6 months’ worth of holding costs/reserves. The Flip Company comes in highly leveraged with less than 10% of the total project costs. The Flip Company buys the property at a discount, rehabs it and flips it within 6 months to generate at least a 25% cash-on-cash ROI on our cash within 6 months.
The Flip Company will either use its own cash or it will enter into a Joint Venture (JV) with the Finance Company for the Finance Company to put up the cash. In return, the Finance Company receives 100% of the profit up to 25% of its cash investment. Any profit above 25% is then split 50%/50% between the Flip Company and the Finance Company. So the Flip Company doesn’t make any money until the Finance Company makes at least 25% cash-on-cash ROI.
If the Flip Company can’t sell the property at retail (at ARV with full sales commissions) or at wholesale (below ARV but above our costs using For Sale By Owner) within 6 months of purchase, it will sell the property to our Buy and hold company by assigning the loans to the Buy and Hold company and transferring title (no escrow, limited paperwork and takes one day).
The Buy and Hold Company: Our Buy and Hold Company pays the Flip Company its out of pocket cash costs plus at least 25% profit. The Buy and Hold company has already calculated that it can rent the property at 90% of market rent and still generate at least a 10% cash-on-cash annual ROI after taxes. The buy and hold company has 3 months’ worth of holding costs to find a tenant and expects to pay a month’s worth of rent to acquire a tenant. It considers the financing costs of the assumed loans, a 10% property management fee, and deducts 5% of the monthly rent for a vacancy rate and 2% for maintenance costs and capex, which all go into a reserve account.
The Buy and Hold Company will either use its own cash to purchase the property from the Flip Company, or it will enter into a Joint Venture (JV) with the Finance Company for the Finance Company to put up the cash. In return, the Finance Company receives 100% of the annual profit after taxes up to 10% of its cash investment while the Buy and Hold Company rents the property. Any profit above 10% is then split 50%/50% between the Buy and Hold Company and the Finance Company. So the Buy and Hold Company doesn’t make any money until the Finance Company makes at least 10% cash-on-cash ROI after taxes.
Once the Buy and Hold Company has a paying tenant in the property, the property will be considered a “Turnkey” investment property and the Buy and Hold Company will market the property for sale as such to buy and hold investors. The Buy and Hold Company will continue to rent the property until it can sell it. Once it sells the property, the Finance Company will receive 100% of the sales profit up to 25% of its cash investment. Any sales profit above 25% is then split 50%/50% between the Flip Company and the Finance Company. So the Flip Company doesn’t make any money on the sale until the Finance Company makes at least 25% cash-on-cash ROI.
You can view the Real Estate Investment Deals we are currently seeking funding for below. Each deal has a comprehensive Deal Sheet that shows all of the assumptions, costs, revenues and timing for the deal. We update the Investment Deals on a weekly basis (usually by Sunday). You can also join our mailing list below to receive notification when we add new Investment Deals.