Good Evening fellow BPers! Quick question:
I am getting ready to purchase a MFH (4 unit) in my local area. I am probably going to make it a joint venture with another individual (my first time doing this), who will provide the down payment on the complex (approximately 40k). I researched and found the property and will liaise to make the deal, as this other indidivual is not closly located to me or the location of the MFH. All four units are occupied and should cash flow ~1,000/month total. I know there are a million different options for what the business deal could look like, but in your guys' vasts experiences if you have entered into a deal similar to this what did you work out? How would you split cash flow? Would repairs be split down the middle? ETC. Thanks in advance!
I think I would use an LLC. I would structure it as 50/50 after he gets his money back; before that I would think maybe 70/30 him. However, if you are going to be handling the day to day, I would ask for a guaranteed payment that gets paid before distributions.
Given that i would be structuring it 50/50, all expenses not paid out of cash flow would be 50/50.
Congratulations for partnering with your first investor. Before asking about the form of partnership, I'm more concerned about the deal itself.
When you say $1,000 total cashflow I assume it's before any debt service, insurance, maintenance, management, vacancy and taxes. Please clarify.
I'm not familiar with your local market, but if the down payment is $40k, I assume the total price is $200k so you'll have $160k leveraged.
I always run the worst case scenario for my investments, but for the sake of this deal, let's run the best case scenario!
As a new LLC, and your first deal, I don't know that you'll find a bank to finance $160k but let's say you found a great financing for 30 years @ 5% interest rate. Let's plugin the numbers!
Mortgage: $856, Maintenance: $100, Vacancy: $100, Taxes:$167 (assuming 1% annual), Insurance: $125 (arbitrary number), Management: $0 (Self managed)
Your total monthly expenses: $1,348
Please note that we didn't account for CapEx or paying back your investor or even the LLC registration and maintenance! Again what do you mean by $1,000 total cashflow?
In case you meant $1,000 net cashflow after all expenses for the worst case scenario possible, then who is qualifying for the mortgage? If you are using your credit, then do you want to take the risk and the management headache but still get paid only 50%?
If your net is $1,000 and your investor is 100% passive and just putting $40k into the deal, his 50% profit is 15% Net ROI which is amazing! Most passive investor would accept 8%-10%
My point is, make sure you have a great deal before using someone else's money. Heck if you pay me 15% ROI, I'll put the $40k! LOL
Hey @Sam Alomari Thanks for the response! I meant $1,000 net cashflow. I will be qualifying for the mortgage. When you put it that way, 50/50 seems a bit disadvantageous for me. What sort of arrangement would you work out in this instance?
@Brian Schmelzlen Thanks for the response!
Well, 50/50 is not necessarily a disadvantage even if you qualify for financing mainly for 2 reasons:
1- The deal is not going to happen without the investor's down payment
2- You are not paying back the mortgage from your own profit. It will be paid by the tenants, so you are building equity!
Is your partner funding the deal as a loan to the LLC? You can convince the investor to give you the $40k as a loan for as much as 10% interest. You'll pay back on 5 years and have 100% control. You won't make much money or no money at all during the loan period but you get to enjoy all the profit and the equity later.
If the investor is only considering equity partnership, then I suggest to lock his equity at 25% and structure the agreement so that it's 50/50 profit split until the mortgage is paid off then it's 25/75 profit split. Since you won't have the mortgage as an expense and since you are expecting to increase your rent over the years, his 25% after the mortgage is paid off is much higher than the 50% profit he is making now, so he should be happy.
If you decide to sell the property or if you wish to refinance once the property appreciated, you own 75% equity so you pull 75% of the refinanced amount.
If your investor is not interested in such structure, sometimes you have to accept less favorable agreement especially at the early stages of your investing journey. a 100% profit of zero is zero! so make your partner happy because without him your profit is zero.
Recently, an investor approached me and offered 25% EQUITY and 25% of the net profit while he will be funding a 100% of the total acquisition and rehab cost. I offered him the loan option but he simply said "I don't want my money back". He realized that he needs me to make it happen so he is willing to give me 25% for finding the deal and managing the whole process. It's a win win!
BP members can always give you many ideas, but I always recommend to run any agreements by your lawyer and CPA for professional advice.