Real Estate Investing with Andrew Lieb

7/26/20: Seg 2: Evaluating Equity For Rent Agreements

July 26, 2020 Andrew Lieb / Lauren Lieb Season 1 Episode 88
Real Estate Investing with Andrew Lieb
7/26/20: Seg 2: Evaluating Equity For Rent Agreements
Chapters
Real Estate Investing with Andrew Lieb
7/26/20: Seg 2: Evaluating Equity For Rent Agreements
Jul 26, 2020 Season 1 Episode 88
Andrew Lieb / Lauren Lieb

We discuss starting a new business and bartering rent for equity in the business.

Show Notes Transcript

We discuss starting a new business and bartering rent for equity in the business.

0 (3s):
Your personal coach and trusted attorney, Andrew Lieb go, we'll help you get started in building your real estate empire, grow your self confidence, find your grit and get the skills needed to dominate the real estate world. This is real estate investing with Andrew Lieb

Andrew Lieb (21s):
In our public service announcement. We'd like to compliment grandma Carla in her excellent work with our kids. Lauren's growling at me like we're about to lose our grandma, Carla, and she's been amazing to us. And I do feel bad that she came out of retirement to watch and teach our children in this very difficult time. And you might have someone like grandma Carla in your life. Like, I don't know if you remember when we were having, when we're having the whole democratic primaries and you might hate her, you might like her, or you might call her, or what do they call her?

Andrew Lieb (58s):
The Indian princess name. Anyway, Elizabeth Warren was talking about how she was able to go back to school B. She had a relative come and help watch her kids. And I, that really touched me. And that was like something that I really cared about because you know, it takes a village to raise kids. And I think it's important to compliment. And thank these people that being said, grandma Carla told us that she won't watch full time and we can't hire someone else to do part time. So the nannies were out, but I was in the T-Mobile. This is how we went into the break.

Andrew Lieb (1m 28s):
And my new friend with the fabulous nails said to me, she interviews people at the local elementary school and she goes, there was a hundred candidates that came in. We were only allowed to hire two. And the two had to be from our district. Anyway, we're not hiring anyone from outside district. She goes, if you go to the local college, like st Joe's or one of these local teacher's colleges, she goes, you're going to be able to get a teacher slash nanny and they can help raise your kid. And they can teach them because they can't get a job somewhere else right now. So going into the break, I was mentioning to you that there was this article that said 90% of businesses get sued at some time when they're open, it was the New York law journal.

Andrew Lieb (2m 7s):
This article went on and it said, it said that 50% of businesses, I thought that was kind of interesting. 50% of businesses were being sued right now. So what are we concerned about with us? We're concerned that, Hey, guess what? Hey, guess what? One of the biggest reasons you get sued is called a weijden hours lawsuit in a wage and hours. Lawsuit says, if someone's working more than 40 hours a week, they need to get time and a half. And here's my favorite part about the wage and hours lawsuit. It says that it's the employer's job, not the employees. It's the employer's job to know the hours that the employee is working.

Andrew Lieb (2m 41s):
And guess what if the employee says I've been working 50 hours a week and you can't prove whether they've been working only 40, you owe that time and a half plus the penalty under the law. And beyond that, you can owe them for time off. You're going to owe them for all the withholdings you're supposed to do. You could be getting an audit, you know what? I'm going to do more Lauren, because I'm not the employment expert here. Why don't we next week have Morty Yankovich come on. He's our employment expert. And why don't we ask him? Because I want to know I'm thinking about now hiring one of these teachers.

Andrew Lieb (3m 12s):
And if I'm going to hire one of these teachers, I think we should get more to Yankovich on. And he's going to show us his tips. I'm going to bring them on to talk about his five tips of how to structure having at home learning while you're still working, because this is like a really big deal that we have to be knowing about. What do you think about that, Lauren?

Lauren Lieb (3m 28s):
Well, I also think that if you have questions and you want to ask Mordy, you can find us at social media at listen to Lieb, L I E B, send us a Facebook message or a message on Twitter or Instagram, and we will address your questions on the air. So, I mean, I think this is really hitting home to everybody because they want to send their kids to school, but they, they, they fear for the health and the safety of their families. And they might have to look at different options of bringing somebody in. If you can't afford it,

Andrew Lieb (3m 57s):
You do need to have money, but you also need to keep your jobs. So you have to figure out the best way to do this. And maybe I'm seeing that the Republicans have a new bill coming down to help with like, you know how we had the cares act. Hopefully they're going to do something for people like you and I, and I did read that they want to do things about childcare in schools, but they need to have backup plan, plan B for working people to come up with a plan where we can do teaching key people home. I just don't know the answer. And maybe that's why I'm not running for office. This is harder for them than it is for me.

Andrew Lieb (4m 28s):
And if you are going to do this, maybe we should do it as like a joint venture. My, my buddy was explained to me that he had knows this doctor that said, you know what? Your kids need socialization. And even though you have to stay isolated, you want to keep your family isolated. Maybe there's a group of another family that you want to be with. What do you think about that?

Lauren Lieb (4m 46s):
Yeah, that would make me feel a lot better, but I would need to really trust those families. So,

Andrew Lieb (4m 51s):
So if you did that with some kids the same age, maybe we could have a teacher for just like five kids to make it more affordable in one of our houses. But again, that's an employment issue and you're gonna have to be doing a joint venture then because a joint venture really is just a partnership and you're all going to be the employee of the teacher. And we were talking a little while ago about opera and, and camps in the backyard, but doesn't that sound like you're now operating a school in your house and is your house even allowed to have a school for other people? And how is that going to work with your insurance?

Andrew Lieb (5m 22s):
And how is that going to work? If you have a rental, are you even allowed to do that with your landlord? And how does that work with zoning? I want the Republicans that are coming up with this new PA and I'm not picking Republicans or Democrats. The Republicans announced this week that they have a new plan in the Senate that they conference with Trump. And they came out with a new plan as a new round to help us because Trump said, when he was talking about his beautiful mask, he said, it's going to get worse before it gets better. And I agree with him, it's getting worse and it's scary. So if we're going to structure this, we have to structure.

Andrew Lieb (5m 53s):
And there's a lot of things to think about while you're structuring a business. I actually had a few consults this week. It's been the week of businesses. I had an interesting one that relates to real estate. Lauren, someone said to me, they have this huge startup they're doing, it's actually trying to go national. And they need a lot of space, a lot of space. And there were in Philadelphia, you know, the city of brotherly love. And they said to me, it's important. It's brotherly love because I told you about the holes that you have, the foyer holes. So anyway, so the brotherly love.

Andrew Lieb (6m 23s):
And so what we learned in this, where they said to me is my landlord said that if we give them equity, then they'll give me free rent. So I thought that was pretty interesting. Since as a landlord, we've said before, make them your partner. So would you want to be a partner though? If you're the landlord, it would, you want to be a partner if you're the landlord, because after all, if you're a partner in this business, that's trying to go national, you know, everyone has dreams. You talk to them, a business person, someone that is going into business, you know what they tell you, I'm going to make so much money.

Andrew Lieb (6m 55s):
We're going to be bought out by a bigger company. We're going to go public. We're going to make Boodles in oodles. And here's my question. Every time, what happens if you go bankrupt, what happens if you need more money, what happens if there's another pandemic and you're closed? What happens in these things? And do you know if the landlord has equity Lord, if the landlord is a partner, Lauren, the landlord is going to be on that loss hook too. So do you want the landlord to be a partner or do you want to instead create a profit sharing arrangement?

Lauren Lieb (7m 29s):
Well, in addition to a profit sharing arrangement, you have to decide, can you just get money as a loan from somebody else? Or is it in your advantage to actually bring on the landlord as a part?

Andrew Lieb (7m 39s):
That's an interesting thought, Lauren. So what you're saying, what you're saying in the math though, is you should figure out how much the rent and voltage is. As soon as simple math is, I don't have my calculator in front of me. Let's assume the rent's a hundred thousand dollars a year, simple math. And let's assume the landlord says, I'm going to give you two years free for the equity. Let's assume that's where there's a $200,000. So are they giving you a free for the equity or are they giving you a $200,000 buy in to the pro to the business where you could have got the money elsewhere and just pay the land?

Lauren Lieb (8m 12s):
What do they want out of it? Because let's just say you got a $200,000 loan. Let's just say that was at 5%. What's more the 5% loan or the loan

Andrew Lieb (8m 23s):
For the landlord. When you're saying a 5% loan. Are you talking about a mortgage loan or are you talking about a loan from a business banker or are you talking about a hard money loan or does it not matter?

Lauren Lieb (8m 33s):
It's all math, right? So you just have to decide which one you're going to get. You have to actually compare them all. That's what I would do.

Andrew Lieb (8m 39s):
So I think you got to start down though and say, Hey, your timing, you want to give me two years free at a hundred thousand dollars each, which is $200,000. And you're telling me that you want 10% of my business. Do you know what I'm hearing? You say, you value my business at $2 million. That's what I just heard you say. And the question becomes do I also value my business at $2 million. If I also value my business at $2 million, this is potentially a good deal.

Andrew Lieb (9m 9s):
As Lauren points out, maybe you can get a loan for less money, interest rate being lower or otherwise, and use the loan to pay the landlord, just the straight money and pay the loan person back. But I think the starting places is the numbers even right, is that the valuation of your business is the question you should be doing. When you go speak to your lawyer, your CPA is the question you should be doing in this situation. If you're a business owner, let's assume you're a restaurant tour and let's assume you want to go open up a great new restaurant is your thing that you should be saying. My landlord wants to be a partner.

Andrew Lieb (9m 41s):
And my landlord's offering me two years free at a hundred thousand dollars a year or $200,000 in exchange for 10%. Is that a good deal? Or should you be saying I value my business at $2 million? Is that a good deal? Well, math just told you that if you value it a $2 million and they're giving you a 10% investment at $200,000, it's a good deal. Then you have to say, what do they want for that? Are they going to want to have a say in my business? Do you want somebody else to have a say in your business? Well, that's interesting because if there are 10%, do they get a say, well, the default rule would be probably no, because they'd be considered locked in and locked out.

Andrew Lieb (10m 17s):
But what people don't often realize is that you can structure a business agreement. However we want, assuming it's a LLC, the operating agreement could be structured that the landlord has all decision making authority or the respect to certain issues. The landlord could be the ultimate decider. For example, whether you're going to grieve the taxes, the landlord could be the ultimate decider as to whether you're going to be expanding your space, how you're going to be furnishing it. You see an agreement, non agreement. I tell you what I told one of these clients today. I said to him, this, I want to repeat it for everyone.

Andrew Lieb (10m 47s):
Don't use buzzwords, get to the fundamentals of understanding. And when you get to the fundamentals of understanding, you're going to know what you're talking about. We're going to continue this conversation after the break, but for now, what I think you should do is you should go, what does it rate this podcast? Lauren rate this podcast.com forward slash leap. That's L I E B. We'll be back after the break.

0 (11m 11s):
Have you ever dreamed of owning a rental property? Flipping our whole opening? A successful business is real estate investing with Andrew Lieb.