1. What am I lending towards? Am I owning a piece of the property?
The real estate property is providing the cash flow to pay back your loan, however you are not actually owning the property. You will be a Debt Investor. As a debt investor, a Promissory Note is signed which minimizes your risk because you will be earning a fixed rate of return (contact us directly for specifics), regardless of the performance of the property. The Note is secured by the property as collateral through the signed Mortgage Agreement at closing for further protection.
2. How much will I earn?
SEC regulations prevent us from publicly advertising the rate that we offer. If you are a close friend or family member, contact us and we will tell you. You will like it better than the stock market. Why do we offer so much? The benefit to us is that it allows us to purchase more properties and grow. We are willing to provide you with a high rate of return for 2-3 years before refinancing with a bank, reducing our interest rate, and finding a new investment with your funds.
3. Can I lose my funds?
There is always a risk with any investment. The reason we are drawn to real estate is because we have found it to have the highest return for the lowest risk. We search for only the best properties in growing markets that are stable investments for the long run. Our experience has shown this to be very effective. In addition, we sign a Mortgage Agreement at closing in order to secure your loan with the property as collateral.
We are glad that you are thinking through all the scenarios because there is an element of downside risk in every action that one takes, even the action of doing nothing. There are numerous ways one could invest in real estate, whether it be Development, House-Flipping, Long-Term Buy and Hold, Multifamily vs Single Family Homes, and in different locations throughout the US. We focus on established, cash-flowing residential multifamily properties in the Midwest that we can buy undervalued since this is the lowest form of risk that we have found, while still being quite profitable.
4. What is the biggest risk?
The biggest risk is to lose one’s funds. Can that happen? Anything CAN happen. However, while a stock can fall down to zero value, a real estate property is a physical structure that provides a survival need to every person. The demand for apartments will never stop, it will only continue to grow as our population expands. Each property is fully insured to cover fires, law suits, and damage. We will continue to pay back your loan, even if it comes out of our own pocket.
5. Do we have legal liability as Lenders for the property if accidents occur during the rehab of the units or during regular tenant use?
There is no legal liability on your end if anything happens on the property. This is another positive aspect as a debt investor. Since you have no ownership of the property, all the legal liability falls on us as the owners.
This would be different if you were an equity investor (part-owner) in which you would share the risk of litigation, as well as the downward risk and upward potential. There are pros and cons to each, but we have found the debt investment structure to have the best balance of generous upside while protecting downside risk for our lenders.
6. I’ve never done this before. Is the process easy to lend?
Absolutely. Simply contact us, let us know how much you would like to lend, and we will add you to our list of private lenders. We buy a new apartment building about every 12 months. The next time we have one under contract, we’ll give you a call to ensure you are still moving forward with us. We’ll send you the signed Promissory Note with our agreed-upon terms, you wire your funds 3-4 days prior to closing to the escrow account through the Title Company. 30 days later we will direct deposit your interest directly into your bank account. Simple!
7. How much can I lend?
The minimum that we would prefer is $50,000. There is no maximum. A typical 50-unit apartment complex would cost about $2M, so in that case there would be an opportunity to lend up to $400k. As we buy larger properties, that maximum continues to grow as well.
8. How and when do I send you the funds?
The funds would need to be wire transferred 3-4 days prior to closing. As the time gets closer we will provide the closing company’s escrow account information for the wire transfer. Your interest would start accruing on the day of the transfer.
9. How long is my loan for?
We are able to sign a Promissory Note for 2-3 years at a time. We need long enough to be able to increase the value of the property through improving the units, exterior, and more efficient management of the building. We will agree upon that ahead of time since it depends upon the property and the situation. Our aim is to provide another lending opportunity for you quickly after we refinance you out of the previous building.
10. I understand that after 2-3 years, if we wanted to move on, our share could be transferred to another lender. Would it be our responsibility to find the replacement lender or would that be something you would do?
This will be our responsibility to find someone to take your place. No action will be needed on your part. In the final few months as the 2-3 years draw to a close, we’ll be in communication with you as to your intentions, which will give us the time required to reach out to our contacts if you decide to move on.
11. What are our options for recouping our initial funds if the property doesn’t perform as expected?
Again, I am glad that you are thinking through all the scenarios because there is an element of downside risk in every action we take, even the action of doing nothing. There is always a possibility that the property doesn’t perform as planned.
The short answer is that we would pay back your loan from our own pocket. We have a good amount of emergency funds that we normally don’t touch which we wouldn’t hesitate to use if required. Furthermore, we have additional cash-flowing properties that we own throughout Wisconsin which provide numerous streams of income. We could use that cash-flow from the other properties to supplement a negative cash-flow scenario with this particular property.
The long answer is in the event of a worst-case scenario in which the funds are not there, Angela and I would never simply walk away. We would work to pay back every dollar owed from our own pocket. In addition, the reason that we sign a Mortgage Agreement with you is that it secures your Promissory Note with the property. A lien is placed on the property giving you rights to the property (or the income from the sale) during a foreclosure process. The position of the lien (first, second, third…) is in order of the dollar amount that one lends. The bank has the first position, and then the next highest investor will have the second, on down the line. This means that the bank would recoup their amount owed first, and the excess that is left over from the sale would go to the second position. From there the additional excess would go to the third, etc. The reason that we look for undervalued properties is to mitigate the risk for all lenders to give them the highest likelihood of repayment in this scenario. We would be there each step of the way to walk through the process. That being said, this is the worst case scenario and we definitely do not expect this to happen.
12. How are maintenance, repairs, and improvements on the property covered? Would these types of expenses ever be an issue for lenders?
The operating expenses are covered by the rents each month. This includes the taxes, insurance, maintenance, utilities, lawn/snow, management, and mortgage payments. Our lenders are debt investors, meaning they don’t hold actual ownership of the property. We maintain the ownership, but use the proceeds from the property to pay their rate of return. Ownership has advantages and disadvantages. By not having ownership, your biggest advantage is the consistency of your return. We’ll pay you your percentage each year (contact us for the exact amount), no matter how the property performs, even if it is out of our own pocket on certain months.
13. How is the interest paid to me?
We will sign a document with you that allows us to direct deposit your funds into your back account. Simply check your bank account each month and you’ll see those funds are there for you. Real Estate doesn’t get any easier than that!
14. How are taxes filed at the end of the year?
This is VERY easy. We will send you a 1099-INT showing the amount of interest we paid you over the course of the year. We’ll send a copy to both you and the IRS. You’ll then take that information and add it to your Schedule B (Form 1040A or 1040). Easy!
Even better, if you are familiar with a self-directed IRA (most people are not), you can lend from that IRA and all the interest income is tax-free or tax-deferred (Roth or Traditional). Contact us for more information.
15. I have an IRA. Do they provide a Self-Directed IRA option? Will you be the new custodian of our IRA?
While we have not set up a Self-Directed IRA, we have read a good deal about them. Most big names do not have this option since they have high incentive to steer you towards their own securities from which they can earn a commission. In simple terms, we would not be the new IRA custodian. You would transfer those funds from your current IRA, assuming they don’t offer a self-directed option, to another custodian that does.
It takes a bit of research to learn who is trustworthy and secure with low rates. Contact us for our recommended custodian.
Once those funds are transferred to the new custodian (which could take a couple weeks), from that account you would lend to our LLC and receive your monthly interest payments tax free (or deferred), minus any fees from the custodian. That custodian would be able to walk you through the process of how to do that.
16. How often are these opportunities available and how can I be notified?
We purchase about every 12 months. Contact us so we can keep you informed! Our next purchase will be in the summer of 2019. Even if you are simply curious, give us a call or email us at peter@sailhamerinvestorgroup.com.
17. Who is eligible to lend with us?
We are restricted to working only with close Friends and Family with whom we have a preexisting relationship.
18. Will you keep your information confidential?
If you decide to move forward with us, we keep your decision and your loan amount completely confidential. While we hope that our Private Lenders tell others of their positive experience, we leave that completely up to them.
19. Can you give me a brief summary of the entire process?
Let us give you a quick rundown about what we do and how that can benefit you (and us). When we permanently moved here to Madison several years back, we (Angela and I) started to buy investment properties and haven’t looked back. We started with smaller duplexes and quickly saw the potential with larger multifamily apartment complexes. As banks began to get to know us, they quickly started to compete for our business for two reasons. First, they learned of our character and work ethic, both in this business as well as personally through my position as a pilot in the Air Force. Secondly, banks prefer to lend towards multifamily investment properties as it is one of the most stable and secure investments out there, especially in the Midwest. There is nothing that comes close.
As we started to grow, friends and family began to notice and started to ask questions about it. They asked what we did, how we found the properties, how we managed them, how we funded them, how profitable it was, and how we dealt with tenants, contractors, insurance, lawyers, and all the others involved in the process. The overwhelming response was “Wow, that is awesome. I wish I could do that too, but it sounds like a lot of work. I have the capital to invest, but I just don’t have the time or knowledge of where to start”. Based on that response, we said what about if you lent towards the down payment for us, and we will do all the work of finding the property, negotiate the sale, work with the banks, manage the tenants, research insurance policies, etc. And in return we’ll pay a X% fixed rate of return on your loan for a term of 2-3 years. Why so high of an interest rate? We want you to stay with us year after year, and to help bring others along too. The response has been outstanding, and that is what we have been doing since with a good number of very happy Private Lenders.
This strategy provides our Private Lenders with a safe, secure, fully insured rate of return on stable assets that have a proven track record. Initially, virtually all of the property’s cash flow goes to our lenders to cover their X% return. Very little, if any, goes to us during those initial 2-3 years. During that time, we are working to improve the value of the property through renovations and efficiency of management. Once we have raised the value enough (typically takes 2-3 years), we will refinance with the bank to a lower interest rate and return your funds back to you, all the while you have been receiving monthly interest payments directly into your bank account. No work needed on your part. The benefit to us comes after those 2-3 years, at which point now we’ll finally receive the cash flow from the property. We are patient and happy to wait. As we are getting near the refinance point, we’ll be talking to you and see if you want to continue with another property. If so, our goal is to be in the purchase process of the next property at the same time as the refinance of the first property, and simply transfer your loan on to the next property and repeat the process, not skipping a beat from your perspective. It is also a chance to increase your loan, if you so desire.
Our Private Lenders are debt investors, meaning they don’t hold actual ownership of the property. We maintain the ownership, but use the proceeds from the property to pay your rate of return. Ownership has advantages and disadvantages. By not having ownership, your biggest advantage is the consistency of your return. We’ll pay you X% each year, no matter how the property performs. Even if it is out of our own pocket on certain months. Also, as debt investors we’ll sign a Promissory Note and secure the property with a mortgage, putting a lien on the property for added security on your part. We take care of all of that and pay those fees for you. It’s very easy. The disadvantage of not having ownership is that you’ll of course need to pay taxes on your earnings, and when that time comes we make that process very easy for you.
Big picture: Our goal is to make the process very very easy for you. You let us know the amount you are interested in lending (we keep that information confidential). Once the time comes and we have a property under contract, you’ll wire the funds to a third party escrow account two weeks before closing, and a month later you’ll start to see the interest payments show up in your bank account. We take care of everything else.
Our next property will likely be around $2M, which means we have the opportunity for $400,000-$500,000 worth of private money to raise. For this reason, we ask for a minimum loan of $50k per lender, simply to keep the number of lenders to a reasonable level. That being said, if $50k doesn’t work for you, let’s keep talking and you let me know what you can/want to loan and we can work it out.
The only two requirements we have are:
1. You don’t need those funds for the next 2-3 years (it depends upon the property and how quickly we project we can raise the value). The exact amount will be decided once we lock in the property.
2. We will be 100% trusting that you’ll honor your word and wire the funds two weeks before closing. There will be plenty of communication before that time, so before we put the offer in, we’ll get one final “Are you in? And for how much”. A lesson we learned from prior experience was to make sure our Private Lenders know the importance of their role.
Other than that, there is plenty of time before our next purchase. We’d love to work with you and help provide you with some diversification of your investments from the over-inflated stock market!
