Originally posted by Tyler Carpenter:
Hey all. Its been awhile since I have been on here.I lost my job and about lost it all trying to start my real estate business but now Im back and ready.I have a silent partner that is going to invest $50,000 in my real estate company. He has given me 5 years to pay him back and is interested in splitting the equity on my properties at this time. What would be a common return for this type of deal. I have never done this type of thing and want to be fair to both parties since he is fronting the cash while I do all the work. Does a 50/50 deal sound good for a 60/40? Just wanted to see what others have done in the past. As always thanks
This is not a 50/50 split as you have spelled it out above
He is loaning $50K to be returned in 5 years. In return, he is expecting a split in equity. Although it is not specifically stated here, I assume this is 50%.
For demonstartion purposes, I am going to assume he will want an equity split of 50/50. Since his contribution is $50K and it will be a long term liability in the entity, he is really not contributing nothing more than a loan. If he puts in nothing else and you then put your time, energy, experience, I would argue your getting less than 50%.
There needs to be a value assigned for your time and expertise which you will need to be compensated for. After 5 years of work, he gets his $50K back and you will not get your 5 years back. Instead, you should be able to draw a salary, a performance bonus, or a deferred payroll credit.
When I get a loan from a bank, I expect to them back, but I do not give the loan officer 50% equity in my company.
I would approach the investor and say, you put in $50k in the form of a capital contribution and I put in 5 years worth of work at a value of $10K / year or $50K. Now you both have $50K each invested.
After the five years, we decide if we want to continue or disolve the partnership. If you disolve, then liquidate your assets or buy out your partner. If you choose to continue, each pull the $50K out of the entity and continue the partnership at 50/50.
If your investor is an active partner, then I agree with getting him/her a better return, an active investor will expect to double his money every 2 to 2.5 years.
If your investor is passive then 15 to 20% per annum is competitive especially if your able to securitize the capital. Doctors, lawyers, and professors are a good source for passive investment capital. Beware of any investor who wants more than a passive role in real estate. I have taken minority interests before and it has bit me in the arse everytime.