Two Part Question Regarding Joint Ventures

[Dustin Beam]

Hello beautiful people of BP,

I have come across a duplex I think could be a very solid deal. It's in a desirable area, with good schools and low crime. It should attract quality tenants. The owner had the property appraised a couple months ago and are selling it $20k below the appraisal number, so instant equity.

Projected Numbers:

Cashflow: $500-600/month

COC Return: 15%

So I know it needs some work. The above projections are based on 20% down and another $20k for repairs. I could could cover the down payment and some of the repairs, but not all. So if I were to do it up right, I would be short some money. There are tenants on both sides, but one is moving. In theory I could keep the other in there, fix one side, and once I gained enough capital, fix the remaining side.

Is this property a prime candidate for a partner?

If you answered yes, how should I go about this? On the one hand, using friends or family could be risky because you wouldn't want business to affect the relationship negatively. On the other hand, starting a long term business relationship with someone you don't know really well has its own built in risks (you might end up hating that person).

I know partners can be great, but I personally don't actually want one if I can avoid it. But, like I always hear on hear, 1/2 of a good deal is better than 100% of no deal.

[John Thedford]

I would find the additional funds needed and do it alone. Partnerships can go wrong at any time. What if they die? What if their spouse files for divorce? What if they are not happy with the return? What if they want to sell and you want to keep it. There are so many possible questions why JV the deal? Whatever you do, if you take in a partner make SURE and have a written agreement agreeing to binding arbitration. That is a LOT cheaper than going to court.

[Dustin Beam]

Originally posted by @John Thedford:

I would find the additional funds needed and do it alone. Partnerships can go wrong at any time. What if they die? What if their spouse files for divorce? What if they are not happy with the return? What if they want to sell and you want to keep it. There are so many possible questions why JV the deal?

 I agree, which is why I'd much prefer to not go into a partnership. OTOH, I won't really have enough money to both buy and fix, and it sounds like it really needs fixed (I'll see it in person tomorrow). The 

I guess you're suggesting I try and find short term loans for the fixing part?

[John Thedford]

Yes. Ask friends, family members, everyone you know. See if it is possible the seller will carry back a 2nd.

[Steve Vaughan]

I'd fix the vacant side, then the other as it turns, Dustin.

If that still stretches you too thin, get a lender. Equity partners scare me, too. @john thedford is an above board lender coincidentally. Maybe he'll share his thoughts on terms in general for something like this.  

I'd probably do $16k for a $20k 2nd mortgage due in 13 months for instance on something like this. Earning interest jacks my taxes. I bet you could do better.

[Dustin Beam]

@Steve Vaughan  Yea I'm hoping I could rent the one side to buy time before all repairs are needed. I'll have more info tomorrow. 

Are there any hang ups with banks, or otherwise, where maybe I purchase it for $10k more than asking and they credit me $10k for repairs? Seems like that happens with traditional homes, although I haven't done it. This will be a commercial loan though.

[Steve Vaughan]

Originally posted by @Dustin Beam:

@Steve Vaughan  Yea I'm hoping I could rent the one side to buy time before all repairs are needed. I'll have more info tomorrow. 

Are there any hang ups with banks, or otherwise, where maybe I purchase it for $10k more than asking and they credit me $10k for repairs? Seems like that happens with traditional homes, although I haven't done it. This will be a commercial loan though.

 I haven't borrowed from a bank in a while, but residentials used to allow a 3% rebate, but not for building repairs. I did landscaping allowances and allowable closing costs.

[John Thedford]

@Dustin Beam ...work on private money. Raising purchase price may not be an option. It would have to appraise. I would see if the seller will do a carry back and make sure your loan officer gives the OK as well. Also, ask friends or family. 20K is not a lot to risk as long as they believe you will stand behind the loan. I probably would consider a HML as long as the cash flow is there to amortize the loan within a short period of time. HML are popular with flipper. Many of my borrowers are in and out within 6 months or less. They are making a good profit and I facilitate their funding. I HIGHLY discourage anyone from considering HML for long periods of time. If you have a way to pay it off quickly it might make sense. Also, rates are all over the place. Expect to pay anywhere from 10% up and usually with points. Getting a HML to take a 2nd may not be easy..you will have to start shopping right away and see what responses you get. Good luck.

[Dustin Beam]

Originally posted by @John Thedford:

@Dustin Beam ...work on private money. Raising purchase price may not be an option. It would have to appraise. I would see if the seller will do a carry back and make sure your loan officer gives the OK as well. Also, ask friends or family. 20K is not a lot to risk as long as they believe you will stand behind the loan. I probably would consider a HML as long as the cash flow is there to amortize the loan within a short period of time. HML are popular with flipper. Many of my borrowers are in and out within 6 months or less. They are making a good profit and I facilitate their funding. I HIGHLY discourage anyone from considering HML for long periods of time. If you have a way to pay it off quickly it might make sense. Also, rates are all over the place. Expect to pay anywhere from 10% up and usually with points. Getting a HML to take a 2nd may not be easy..you will have to start shopping right away and see what responses you get. Good luck.

I don't really know any private money lenders and frankly I don't feel real comfortable with it because I'm ignorant about all the ins and  outs.

As far as raising the purchase price, it should appraise over asking. The seller had an appraisal a couple months ago, which I've seen. It appraised 20k over what he is asking. The question is whether anyone involved would take issue with me essentially rolling repairs into the mortgage. 

For some reason it won't let me "vote up" your post.

[John Thedford]

Don't do anything you aren't sure of. If HML scares you, stay away. Ask your lender their thoughts on raising the purchase price for rehab costs. No worries about voting on my post. If they had a thumbs down, I would probably get a few of those from scammers promoting dishonest practices:)