Potential Deal, Input Please

[Loc R.]

Deal 1:

I've got a motivated seller of a 4-plex. With a cash offer of $150,000, the cap rate is going to be 15.2%.

Now, I've got an investor lined up who will fund 70% the deal (I'm putting up 30%) at 7.5% (20 years).

My plan is to then sell the property on a wrap for $225,000 (10.1% cap rate), require 20% down ($45,000), and to carry the balance at 9.0% (20 years).

My question is, does anyone see a better way of structuring this deal? Devil's advocates are welcome.

[Dory Peters]

Actually, I believe I do know of a better way to do this deal. If you two were my partners, then I'd pitch something similar to the following. (Please note that I underlined the proposed changes.)

buy side of transaction:
purchase price: 150K cash (as before)
your partner supplies 70% of the equity, and gets 70% of upside
you supply 30% of the equity (as before)

sell side of transaction:
selling price: 225K (as before)
down payment (5%): 11.25K
land contract for 95% (213.75K) at 7% APR, amortized for 30 years, with a 5-year balloon
escrow the title, and hold it deed in lieu
sell that note for 80% of its value

This way you won't have to wait 20--or even 5--years to pay off your partner, and you both will get paid much sooner. Plus, after your partner runs the numbers, s/he will realize that s/he will earn more (ie a higher IRR) via the upside than the interest over 5 years (due to selling the discounted note immediately).