Down Payment Investing Partner

24 Replies

Hello,

A partner and I are going into a multi-family building together but need money for the 20% down payment. What is customary for this? Would that cash partner receive 50% and my other partner and I split the other 50%?

What is it you and your partner are going to be doing?

I've considered this scenario from the perspective of the cash investor for the down payment.  I'm having a hard time coming up with any other answer than, as the one putting in 100% of the cash, I want 100% of the equity.

If you're going to manage the property, I think you deserve to get paid the property manager's fee.

If you're finding the property and offering it to me, a RE commission or finder's fee would be in order.

If you're going to manage the rehab to get it rent ready, a fee for that service would be in order, too.

But I'm having a hard time with any of that justifying an equity stake on your part.  So, what it is it you would be doing beyond the three things I've listed that you think earns you a stake in the deal?

@Blake Yarbrough  

As @Jon Holdman  mentioned above, you have GOT to bring something to a partnership.  Is it possible to get zero money deals done, but you'll have to bring either (1) the DEAL or (2) the experience/property management to the table.  Otherwise, you'll likely never get the deal done.  Unfortunately, nobody will give you something for nothing...

That said, I would suggest working on creating the value you can trade for the other piece of the deal (either money or the REALLY good deal).

I agree with Jon in principal.  But it is hard to get 100% of the equity.  

The big problem I have run into is when I am "partners" with someone with zero money at risk in a project, it rarely turns out great for me.

You also might want to change the "Houses for Sale" link on your website to read something else.  Unless you actually hold title to the house in question.  Otherwise you're  practicing real estate brokerage without a license.

@Blake Yarbrough  

If you can structure the deal where you get the 80% financing with good terms and rate in place and it is a good deal meaning under contract with good terms, purchase price under market value and also being the asset and property manager. Then maybe you can get away with 50/25/25.. Cash flow is split 50/25/25 but equity is split 50/25/25 after the capital is accounted for..  In other words if your partner invested $100K and the sales proceeds of the property is $200K its not $100/$50k/$50k at closing.. The investor gets his $100k capital back then the $100k is split.. $50/$25/$25

I did this twice already.. The first time my partner force me to put in 2% which I ended up doing.. The second time all my acquisition costs I got back at closing..

It comes down to the deal and how your partnership is structured..

Hope this helps

@Hai Loc

i'm contemplating something similar; i can get 80% LTV. i bring in a cash partner for the downpayment on an investment property we turn into a vacation rental.

let's say the pp is 100k.

1. partner puts in 20k (and has this as lien on mortgage)

2. i manage the vacation rental over the summer.

3. we split cash flow (with property management fee considered).

4. then we split equity  .

is this essentially what you're outlining above?

any simple alternate solutions you can think of?

thx for yr time. 

I'm wanting to do the same thing and I wonder if it's customary to give a ROI until the down payment investors cash is recouped or is it customary the investor ALWAYS wants equity?

@Blake Yarbrough why not have the individual loan you the down payment, secured by the property, at a rate that is more than he can make in the market or in a CD and calculate that amount into the total debt service.  Refinance in a couple of years pay him off and you ask him if he wants to fund the next down payment.

Originally posted by @David Miller :

@Hai Loc

i'm contemplating something similar; i can get 80% LTV. i bring in a cash partner for the downpayment on an investment property we turn into a vacation rental.

let's say the pp is 100k.

1. partner puts in 20k (and has this as lien on mortgage)

2. i manage the vacation rental over the summer.

3. we split cash flow (with property management fee considered).

4. then we split equity  .

is this essentially what you're outlining above?

any simple alternate solutions you can think of?

thx for yr time. 

 That is pretty much it. Split cash flow. One thing a lot of people get mixed up with is capital investment and equity.. if you don't explain this properly the investor may think you are scamming him. When you say equity is split the first thing they will think is "my downpayment too?" cash flow is always split but on the sale or refinance capital investment "down payment" is given first..

When you guys sell the property the closing company will first look at how much is owed to bank then capital invested by partners as stated in partnership agreement..

Originally posted by @Buck Ivie :

I'm wanting to do the same thing and I wonder if it's customary to give a ROI until the down payment investors cash is recouped or is it customary the investor ALWAYS wants equity?

 I don't think this is normal. It's like working for free or at a discount and hope that you make money. I can see someone doing this to get the deal done.. I think the deal has to be so bad for an investor to ask for this. you as an investor need to find an amazing deal for this conversation to never arise..

good luck

I'll repeat what I said above.  If you were to offer me this:

let's say the pp is 100k.

1. partner puts in 20k (and has this as lien on mortgage)

2. i manage the vacation rental over the summer.

3. we split cash flow (with property management fee considered).

4. then we split equity .

I would laugh and tell you to go away.  I might tell you "fine, I'll buy it, you manage it, and I'll pay you the PM's fee."  Because that's ALL your bringing to the table.  

Other than the deal itself, which I might be willing to pay you a fee for finding. Might in that if this is simply a deal that's on the MLS and all you've done is point it out to me, I wouldn't pay you anything. OTOH, if its a private deal that you found of your own efforts, I'd be willing to pay you something for your efforts. Or, if you have an MLS deal under contract, and even with your fee its still a good deal. But if all you're doing is acting as a PM, that's all I'm willing to pay you for.

No conventional lender is going to allow you to have a CLTV (combined LTV) of 100%. They all want to see some of your own skin in the game. So, the lender of the 20% down payment is not going to be able to put a lien on the property behind the first. And, if the money is borrowed and you lie on your loan application about that (they will explicitly ask and you will have to explicitly lie if you want the loan) then you're committing loan fraud.

If you have to turn right around and sell this property for some reason, I,as the lender of the 20% down, will suffer a 50% loss.  Even if you sell at exactly the same price you paid, costs will eat up half of my down payment.

Maybe you can find someone willing to give you the money on these terms.  I wouldn't.

A 50/50 split for money vs. labor makes sense on a fix and flip.  There's a lot of labor.  A 50/50 split with a property manager on a buy and hold is WAAAAY too expensive.

If you're basically asking this third person to loan you money for the downpayment, why don't you do just that? Pay them back over, say, 3 years. They have zero stake in the property. They simply loaned money. And this would be attractive because if they have cash laying around, you'll give them a better return than it's making in a savings account, CD, etc. 

I did exactly this once before. I pay him $100 per month for 3 years. After 3 years, he gets his initial lump sum back. You could structure it like that, or structure it to pay the interest and principle of the loan each month too.

Of course, your cash flow has to really work for this to not get you in trouble.

To add, it is not impossible to find a lender/bank to give you a mortgage when also loaning the down payment because, surprisingly, not all ask or confirm where the money came from. My bank didn't even care how long the funds had been in my account.

It's hard to find, but it's not impossible.

Originally posted by @Jon Holdman :

I'll repeat what I said above.  If you were to offer me this:

let's say the pp is 100k.

1. partner puts in 20k (and has this as lien on mortgage)

2. i manage the vacation rental over the summer.

3. we split cash flow (with property management fee considered).

4. then we split equity .

I would laugh and tell you to go away.  I might tell you "fine, I'll buy it, you manage it, and I'll pay you the PM's fee."  Because that's ALL your bringing to the table.  

Other than the deal itself, which I might be willing to pay you a fee for finding. Might in that if this is simply a deal that's on the MLS and all you've done is point it out to me, I wouldn't pay you anything. OTOH, if its a private deal that you found of your own efforts, I'd be willing to pay you something for your efforts. Or, if you have an MLS deal under contract, and even with your fee its still a good deal. But if all you're doing is acting as a PM, that's all I'm willing to pay you for.

No conventional lender is going to allow you to have a CLTV (combined LTV) of 100%. They all want to see some of your own skin in the game. So, the lender of the 20% down payment is not going to be able to put a lien on the property behind the first. And, if the money is borrowed and you lie on your loan application about that (they will explicitly ask and you will have to explicitly lie if you want the loan) then you're committing loan fraud.

If you have to turn right around and sell this property for some reason, I,as the lender of the 20% down, will suffer a 50% loss.  Even if you sell at exactly the same price you paid, costs will eat up half of my down payment.

Maybe you can find someone willing to give you the money on these terms.  I wouldn't.

A 50/50 split for money vs. labor makes sense on a fix and flip.  There's a lot of labor.  A 50/50 split with a property manager on a buy and hold is WAAAAY too expensive.

 Thanks, that does put it out there a little better.  I guess im having the difficulties with hearing all the stories of how everyone is doing it with no $ of their own in it and I seem to get nowhere.  My first property the cash did all come out of my own pocket but going at that model itd take to long to get the second.

The second response by Nicole is kind of more what I was trying to get to, I just worded it wrong.  Offering back on an actual loan for the down payment is more or less what I meant

Im going to bump this up because its very relevant to a lot of us out there that are looking for the DP loan to get into a property. 

I am glad I came across this thread because I am active duty military overseas so I am not able to use my VA loan to purchase a duplex that I want to move into in the future. So I have to get creative about the down payment on a property because I don't have the 25% to put down on a property.

I really like the idea of paying back the lender at an interest rate thats a little better than they would get investing in the stock market, etc. then paying back the lump sum when you refinance the property

I was reading an article today, and this looks to be the best place to discuss it. There appear to be some new startups offering to pay up to 50% of the down payment on a house in exchange for around 35% stake in the house (they collect this upon sale). I would have to read the contracts to see specifically what their terms are but, what does everyone think of this? assuming they would not restrict your use of the property for investment purposes I have to wonder if this would be an efficient way of partnering in the beginning of your investment career?

I'm still having difficulty with this too. And it isn't that i have no money of my own. My company holds a 100k line of credit and we have another 200k in cash. There area  few great deals that require around 500k cash, and even if we split profits and equity with someone then the work doesn't seem to justify the profit. Maybe i'm just not finding the right deals?

@Charles Barnett undefined

Can you share those startups specifically along with their terms, I'm in the process of structuring a deal like this now where I'm loaning the DP..... 

What is the 35% state exactly?

@Joseph Catalano this is exactly the type of process my partner and I are attempting to articulate in the next phase of our business plan In order to maximize our network expansIon. Do you know anywhere that this strategy is examined more in depth? (Your analysis was very helpful!)

@Kyle Jefferson I have not read it in any forums or articles.  It a tactic that we have used in past and are using in our couple purchases.

This is a great thread. I looked it up because I was reading Brandon Turner's "The Book on Investing in Real Estate with No (and Low) Money Down", but couldn't get past p.46, where he gives the example of Brian using his aunt's $40,000 for a DP on a triplex, and they split the cash flow 50/50 and the sale proceeds 50/50. Doesn't say anything about paying back the aunt's $40,000 so the deal just didn't make sense! No one would agree to that offer. Wondering if I was missing something??

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