Investor · Los Angeles, CA · Member since 2016 · 65 posts · 9 votes
I have an interested party that would like to buy in to my real estate portfolio. The current valuation is $1 million with a debt service of $300,000. If he wants a 25% stake in the portfolio what is his buy in amount?
Frisco, TX · Member since 2017 · 201 posts · 95 votes
9y
another thought - what is the cash flow? The partner will be "buying" a piece of the cash flow as well as a 25% share in the equity. If he invests $175K, what would be his annual cash flow from this? Perhaps use a multiplier on that. If annual cash flow is $70K, buying in at 25% gives him $17,500 of that. That gives him an instant ROI of 10%. If he buys in at $200K his ROI is 8.75%/yr.
Frisco, TX · Member since 2017 · 201 posts · 95 votes
9y
I would say $175K? If you sold today for the $1M and paid off the debt of $300K you would be left with $700K. So 25% of that would be $175K. I don't know if that makes sense. Maybe you need to get a "premium" for it as you have spent the time and effort to create the portfolio?
Akron, OH · Member since 2015 · 178 posts · 189 votes
9y
This fits into most of the things from business school: "it depends" since there is no one absolute correct answer for this.
The straight math answer has been given. Ms. Grumbach also mentioned the idea of a premium that would reward you for the work it took to get to the point of having $700,000 in net real estate assets. I recommend definitely getting a premium in addition to the $175,000 to compensate you for your risks and work in getting to this point. You will only get one bite at this apple, though, because going forward, you will be bound by the partnership agreement, and the equity will be 75%-25%.
Frisco, TX · Member since 2017 · 201 posts · 95 votes
9y
another thought - what is the cash flow? The partner will be "buying" a piece of the cash flow as well as a 25% share in the equity. If he invests $175K, what would be his annual cash flow from this? Perhaps use a multiplier on that. If annual cash flow is $70K, buying in at 25% gives him $17,500 of that. That gives him an instant ROI of 10%. If he buys in at $200K his ROI is 8.75%/yr.
Thanks! Any method to figure out the premium that you mentioned?
See the second post I made. Ask the investor what he's looking for in terms of ROI. If he says he wants 8%, $218,750 would buy him 25% equity and earn him 8% if the current cash flow on the portfolio is the $70K i mentioned earlier. You have to decide if you think that's "fair" and then present it to him. From a numbers perspective, it seems "fair" to me but I didn't build that portfolio though I have built a business in the past and sold a 25% stake in the business to a partner who eventually bought the whole business.