Christian Osgood shows how to raise capital on real estate without violating loan covenants. Pledge an LLC membership interest as collateral, or structure an equity partner with a preferred return and buyout option. Either way, the property's cash flow must cover what you owe.
Chapters
How to use debt without actually using debt. This is a really important thing to understand. A lot of real estate has what's called a no further encumbrance. You get a first position loan against the piece of real estate, and it says specifically you cannot put additional loans against this property. Now, there are many ways around this that are completely legal and fine. I have a favorite that I use all the time that you should look into as well. By the way, welcome to the channel. My name's Christian I've bought hundreds of rental properties starting with no money. I've had to learn a lot about a lot, most of it the hard way. My goal is to document all of it on this channel for here so you can more efficiently replicate exactly what I've done if you so choose. Build a portfolio that scales to the financial freedom that you want, and whatever that looks like for you, this is one of the ways that I did it for me. So when we're raising money, I've had some deals where I'm like, boy, we need to get more capital into this deal, or maybe just to close it, I would like to take on more money. Like say, say I have a down payment of 10% on a 90% seller finance deal. Even if I figured out 90% of the money, the 10% has to come from somewhere. Or maybe I'm mid-project and I want to do a large renovation. I can't get additional debt against the property. How do we back the debt? I found a strategy that has worked well for me. This may work for you. I buy a lot of these properties in partnerships or in LLCs. It's called the LLC pledge. Talk to your lawyer before you put this together. Don't just slap this together because you might accidentally create a debt product. Make sure that your lawyer actually drafts the paperwork. But it's a, pledge against the interest in the LLC. Instead of encumbering the property, I am pledging, I am backing a note or equity against the LLC. There's two ways to do this. An LLC pledge says, hey, this LLC owns this building and I am staking my interest in this LLC. So I'm backing it by my interest, say 50% of the interest in this LLC for whatever money that you're going to loan.. So a loan can be backed by LLC interest. It does not go on title. It does not further encumber the property, even though that LLC owns the property. Now you want to have a clause in there that states what happens if you are to sell the property, uh, because you don't want to devalue the backing of whatever the note is. But in lieu of encumbering the asset, putting a loan against the asset, you can put a loan against your interest in the LLC that owns the asset. It will not show up on title. It works in many cases. Now, some bank notes will actually specify that you can't do this and you cannot pledge your equity. So make sure that is allowed in your note. But I found on a lot of my seller finance notes, there's no stipulation there. I can literally back debt against the property. Here's another way you can do it. If I want to have an equity partner and I want to treat it like it is debt but not really debt, I can offer a preferred return. Example, an investor comes in and they would like to get that— say they would lend it 8%. I say, hey, I'm going to give you an 8% preferred return. So the first 8% from this deal, the money goes from you and the remaining, either you can negotiate it all goes to you, or maybe there's a different split. Maybe it gets split 80/20 with 80% going to you after they've met their 8%. However it is, you can structure the cash flow of that deal flowing to that investor very similarly to debt payments. Now it's not debt because they're actually a partner. They're an equity partner and you've specified their pay structure. Well, That comes with a balloon and I want ownership of the property. Equity just means they're another owner. How do we get rid of them? The option clause at close. Say someone brought 10% down for my deal. I can actually say, I'm going to do this with an option to buy you out at a fixed price, at a fixed period of time. And that price could have an actual multiple. It could be, I'm going to buy you out at 1.5% of what you bought in. And I'll pay you a little bit of cash flow along the way. You can get really creative with these.. But I make every single deal follow this one rule. And note takers, write this one down. In real estate, the real estate needs to buy the real estate. If I'm starting with no money, I can't spend my own money on buying the real estate. If I borrow money, I have to come up with a way for the property to pay them back. So if I'm going to increase the value of the property, I might refinance later and I might be able to buy them out for that option amount. But I'm going to do the math, see what the deal can support.. And I can actually use an equity partner with an option clause to buy them out, which gives me the exclusive right to buy them out at a fixed period of time at a fixed price. And when I execute my plan, I now have 100% equity in the deal. We treated equity very similarly to debt, but we followed all of the rules. We were able to do monthly payments. We were able to customize our product. And buy them out at a later date. So you may be able to do an LLC membership pledge, which is literally debt against the LLC as opposed to against the property. That is a viable workaround if your note does not say that you cannot do that. You can also bring on an actual equity partner and another owner in your deal with an option to buy out in the future. These are two different ways to use debt without really using debt. Without further encumbering a property, how can you adequately back someone's note? Borrow money and either get a down payment for a property or fund another project to expand your property, to improve your property, to do capital expenditures. I hope this helped. If you're getting stuck on real estate and you're like, what are my maneuvers if I have a no further encumbrance on the property, there's two of them that might help you. As always, if you enjoyed this or you found this at all interesting or helpful, we've done a lot of a lot in creative finance. Hit that like button, subscribe to the channel, ask any questions you have below, or attend Whiteboard Wednesday every single Wednesday, 3 o'clock Pacific, 5 o'clock Central. I go live and answer your questions on this channel right here. I appreciate you watching. We'll see you on the next episode.
