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Equity Sharing | Creative Real Estate Investing for Beginners | Video 2 - YouTube
Channel: Epic Real Estate Investing
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Creative real estate investing
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is the practice of inserting
an idea in place of money.
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As a real estate investor,
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it's never a money problem
that's going to hold you back,
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but rather an "idea" problem.
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And we refer to these
creative ideas as terms.
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Terms like equity sharing, options,
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lease options, agreement for deed,
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seller carry back, subject to, wraps,
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all inclusive trust deeds,
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and there's so much more.
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And you'll see links in
the description below
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where I walk through each of
these terms, one at a time.
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Right now though, in this video,
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I'm going to show you
how to use equity sharing
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in your creative real estate investing.
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But before I do,
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click the subscribe button
and ring the notification bell
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because I post cool stuff
like this each and every week,
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and you don't want to miss it.
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Let's do it.
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Equity sharing: it's the
sharing of ownership,
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value, and appreciation
of a piece of property.
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It's not commonly known in what we do here
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with single family residences,
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as much as terms like "lease
options" and "subject to"
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and "seller carryback" are known.
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As equity sharing, it's most commonly used
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in commercial real estate ventures,
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but it can be a very
valuable creative idea
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to invest in residential as well.
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First thing, what is equity?
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What is this thing that
we're going to be sharing.
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Well, equity is the value of a property
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less the debt and liabilities
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that are attached to the property.
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For example, if we purchase
this $100,000 property
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with a conventional loan
that required 20% down.
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This portion here is our equity,
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the amount that we put down.
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Or if we purchase the same property,
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and used out negotiating skills,
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which makes up a significant portion
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of creative real estate investing
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to purchase at $90,000,
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then this would now be our equity.
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And once we finalized the purchase,
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that equity can increase in multiple ways
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like through appreciation,
through principal pay down,
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and increase in income,
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or adding square footage,
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or a change in the property's use,
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and/or negotiating the price or terms
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up front with the seller.
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That's what equity is,
the value of a property
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less the debt and liabilities
attached to the property.
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Now, a creative real
estate investing strategy
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could involve sharing this equity;
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of which a partner would
share in the upside
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and the downside, if there were any.
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And the common arrangement
for equity sharing
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is where one person would play
the role as a money partner,
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and the other person would play the role
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as the time and knowledge partner.
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We've talked about all of
that in the previous video.
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Remember, the four key resources
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of a successful real estate investor;
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we had time, knowledge, money, and credit.
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But in other words, for
this specific scenario,
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one person puts up the funds,
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and the other person oversees the rehab,
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the management, and/or the
resale of the property.
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One or many equity partners
could be the silent partners
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while the other would be more active
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in dealing with a property.
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That's a common example.
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But there are no hard and
fast participation rules
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except as defined in your
equity sharing agreement.
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And let's look at what that
agreement might look like.
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The equity-sharing process for you
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would typically work like this:
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1. Identify an investment property.
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2. Identify a partner.
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And that could be another investor
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or a home buyer that will
live in the property,
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or even the existing resident owner
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when you make the purchase.
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Although another investor
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that does not live in the
property is preferred.
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And I'll touch more on
that in just a second.
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3. Seek professional advice,
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like the advice of your
attorney or an accountant,
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as there are many variables
at play with each individual,
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and each individual's situation.
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For example, you may want to consider
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different levels of asset protection,
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and different levels of tax strategy.
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Don't underestimate this part
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as it can be difficult to
make changes after the fact,
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and very beneficial and
lucrative before the fact.
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4. Create the plan.
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Agree in advance with your
equity-sharing partner,
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in writing, on a plan
of buying the property,
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and how and when to liquidate,
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and just in case, include a buyout option
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along with what-if clauses.
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Use a local real estate
attorney to help you with this.
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I don't recommend you doing
this part on your own.
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And a good rule of thumb
is to plan your agreement
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for the worst case scenario.
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Enter that agreement as you're
going to be married forever,
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but plan for a divorce on day one.
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And then once that's out of the way,
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you can now then comfortably focus on
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the investment and its performance,
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and profit happily ever after.
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5. Take title.
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In other words, buy the
property, close on it.
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Close on the property and take ownership.
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Now, you could take title
as tenants in common,
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that's a simple way to do it,
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but your partnership planned and drafted
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in a detailed entity
agreement as venture partners,
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that's best.
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See step four.
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Now, about sharing equity with someone
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that's going to be living in the property.
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It's my strong recommendation
that you don't do that.
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If you choose to do an equity sharing deal
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with the resident of the property,
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you must first consult a good
local real estate attorney
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to discuss the local
laws that are at play.
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Because it's just too easy
in our litigious society
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for the investor to be seen by the courts,
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to be taking advantage of the homeowner
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residing at the property.
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Remember the old adage,
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"Possession is 9/10 of the law."
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This may not be literally true,
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but it can certainly make
enforcing your claim on the equity
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much more difficult.
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Now, an alternative could be
sharing with the resident owner
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as long as they move out
to another residence.
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And it might look something like this:
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Mr. Seller, the current value
of your property is $100,000.
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I can give you $50,000 for it today,
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and then when I resell
or refinance the property
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at any price above $110,000,
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I'll split the equity or the profit 50/50.
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So if I sell this property a
year from now for $120,000,
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I'll split the $10,000 with you
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and then I'll send you a check for $5,000.
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That is a very valid and possible scenario
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to help you buy property at
bigger than normal discount;
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by promising the seller a little bit more
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on the back end of the property.
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Note: It does not have
to be a 50/50 split.
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This was just a simple example
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of how else an equity sharing
deal can be structured
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to help you buy property
at a deeper discount.
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So, is equity sharing the best structure
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to create for your deals?
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Or is there another idea
to where you can keep more,
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if not all of the equity for yourself?
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Follow me to the next creative
real estate investing term,
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options,
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of which is another rarely
discussed creative idea
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that can secure all of
the equity for yourself,
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and make you a boatload
of money in the process
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when done the right way, of course.
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If you'd like to read up on it,
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and get an idea of what's to come
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with all of the different terms
you have at your disposal,
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and how they work together
to invest in real estate
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with very little to
none of your own money,
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you can download the same cheat sheets
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that I give to my private
students at EpicBreakthrough.com.
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But before you do, let me
know below in the comments,
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what did you find most valuable
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about what you learned today?
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And check the description
below for the rest of this
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Creative Real Estate Investing
for Beginners series.
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Thanks for watching.
I'll see you next time.
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