Partnering with the existing Homeowner...?

Question

I have the opportunity to partner with an existing homeowner in a college town to rent his property out. Let me explain...  He currently lives at the property as his primary residence, but he will be moving to a home closer to work.  His house is in prime rental area and is adjacent to a property I own already. Purchasing the property isn't an option. He has a home equity line of credit on the home that maxes out its equity. So if it's worth $200,000, the home equity line of credit, along with his mortgage, bringing the total amount owed to right up around $200,000.

I was thinking that I would bring in a certain amount of money for repairs to bring the home to rental ready condition and to have cash on hand for a safety net. I will be managing the property also.

My questions are,

- how would you structure a deal like this?

- what do I need to know

- how do I protect myself.

- how much should I charge fro running the property.

- are my expectations realistic

Bill Gulley · Answer

1. Owner does not want to sell!

2. You don't have a license to do a PM agreement.

3. You haven't mentioned PITI, liens, or income available.

4. Equity has nothing to do with it if it's not for sale.

5. You need to be a principal related to the property to manage without a license, the property could be set over into an LLC with you and the owner as members. This could trigger the due on sale clause issues.

If this is a friend of yours, you can't help unless he is willing to transfer an interest in title, there may not be any profit, tell him under the circumstances he needs to get a Realtor/PM.

Not every house you find will be a deal, personal relationships don't set the stage to force a profitable situation, IMO, move on. :)

Steve Vaughan · Answer

Typically I would try and buy a $0 equity property subject to the existing mortgage, but never with a heloc.  The due on sale clause being activated is so much more likely with the heloc. If you are not a licensed agent in your state and therefore not able to be the PM on a property you don't own, I would lease the property from the homeowner for very little, and sub-lease it to the end renter for more, putting a little management fee in your pocket.   Sounds like the main reason you are doing a 'deal' on this is because it's adjacent to your property?  Could be a lot of headaches and some out of pocket for nothing or nothing much.

J Scott · Answer

What amount of rent would it bring?

What are the owner's payments on mortgage/HELOC every month?

My guess is that after all expenses, mortgage, vacancy, capex, etc., you're probably looking at a few hundred dollars per month to split.  Do you think the owner is going to be willing to give up 50% ownership and 50% of the cash flow just to have you property manage it?  Consider that he could probably hire a property manager for a lot less.

If you can convince him, more power to you...but you should be realistic about what your cash flow will be (it WON'T be $2000/month), so that way you can set realistic expectations with the owner as well.

Also keep in mind that if you don't have an equity in the property, it may be illegal for you to property manage it (depending on the laws of your state).

Peter MacKercher · Answer

2000 a month profit. Did you remember to subtract mortgage payment to the bank taxis insurance and hold backs. I agree with

Jesse T. In this situation would probably just want a standard PM agreement, if I was you.

There isn't any equity to split and paying for repairs seems like throwing good money after bad.

Brian Johnson · Answer

The repairs to the house would be minor and would bring the house to rental ready condition. The profit would be around $2000/month so it would be throwing good $ after bad $.

I would like to take ownership of 50% of the house as well as manage the property under a PM agreement.

Jesse T. · Answer

In this situation would probably just want a standard PM agreement, if I was you.

There isn't any equity to split and paying for repairs seems like throwing good money after bad.