How to structure buy and hold deals with outside money?
Member since 2022 · 26 posts · 13 votes
I understand how raising $ via hard money/private $ is paid back on flips through the profits made. However, I am wanting be to a buy and hold investor. For example, I have a potential deal coming up for a SFH. Regarding the down payment and rehab costs (~30k), if I were to look for outside money to fund the costs, how could I structure the deal? I have a family member who's interested in partnering, but if the property cashflows a couple hundred dollars per month and we split it, the ROI in very poor for my family member. I know that equity is another option, but since I plan on holding long term, a profit via sale would not happen for many years. I'm just not seeing how to effectively scale using outside % from a buy and hold perspective. Any suggestions would be greatly appreciated. Thanks!
That's a great question. I would start from the end and work backwards. What is your investor looking to gain from this deal. Is it simply a decent return on their $? I know you said that splitting a $300/mo cashflow is not attractive. I'm not sure why though. If they only put in $10k and are getting $150/mo in profit after reserves, then they are making 18% on their money. This is an awesome return with a secured asset! The return % should be the focus here. If they want to make more, they'll have to invest more (assuming you can generate the same returns on a cash/cash basis with larger deals).
If the investor is hoping for a quick return of capital, you'll need to focus on strategies that allow you to refinance quickly or sell (flip, BRRRR, double-close wholesale transactional funding, private HML, etc.).
BRRRR is the most obvious use case though for quick capital return and a long term hold. Use HML to fund acquisition and rehab, and private money for the gap. Once you refi, pay off everyone. It's even better if the private lender can lend you 100% of the money. That way you can put the full loan on the closing docs and do a rate and term (no seasoning) refi for the back end financing (vs. cash out refi which has 12 month seasoning).
But really you need to know what the partner's goals are. And then structure deals that meet their goals. Otherwise they will not work with you.
Equity is certainly another option, to give them 50% of the equity and cash-flows for 100% of the funding. The main problems here are that you're giving up a lot of value in exchange for a little money. Also, unless this investor has unlimited funds, you're going to be out of money again after the first deal.
@Taylor Robertson, if this was a straight turn-key purchase, I would say that you don't have any real exciting way to make this reasonable for the family member unless you give up 50% of the equity and cashflow.... likely making it boring enough that neither of you want to do it.
BUT
Since you said that you are going to rehab the deal, I would consider treating the family member like a lender. the provide the money, once you complete the refinance, they get their money back plus interest and you keep the property. Ask them what they would need. The only other things that you'll need to consider if you go this route is that the primary rehab lender would not likely allow them to hold a lien on the property AND they may want that person to be on the borrowing entity since they in-fact are providing all/most of the "skin-in-the-game". Both of those things are solvable with the right loan product.
Git'er DONE!