help analyzing 'deal'

7 Replies

To answer this question, I think my age (62) should be taken into account, as the benefits might not be as great for someone my age.

I own half a house with another investor. I have the opportunity to buy him out. We've had this house for about 7 years, and have consistently earned, after all expenses, 500 dollars each every month. The cost of the other half of the house is now about 68,000 dollars.

For that investment of 68,000 dollars, I have half of it in cash, and the other half would have to be a loan. I would earn 500 dollars for that half as well, so now I would be earning 1000, after all expenses, instead of 500. 

I like the house. It's a semi in a C+ neighborhood. We completely renovated it seven years ago, so it's in great condition. I have a great manager for it, as I am not local. 

It will probably not significantly increase in value, but the rent should hold pretty steady.

My goal is to increase my 'passive' income so that I can cut myself some slack, and reduce the pressure on me, to be earning X amount at my day job. 

I want the freedom of the possibility to NOT do my day job, if I so choose, within the next year or two. 

On the other hand, buying that half of the house means that ALL my cash is tied up, at least temporarily.

It would take me a few years (two to three) to regain cash reserves. 

Any thoughts?

Any thoughts as to whether or not I should go for this, or keep my cash liquid. I would consider hard money lending, but I need to be 100% sure that my money is guaranteed, and I'm not sure how the taxes, being that that would be considered active income, would be affected.

Thanks in advance for all your responses and help.

@Shoshana Shulman can you refinance the whole property at 75% LTV into your name and avoid coming out of pocket so much money or is that not an option as an out of country investor? Side note: I can't wait to visit Israel again. Went in 2003 and have dreamed of returning ever since. What an incredible experience it was!

Thank you so much for responding. To answer, no, I can't refinance the whole property at 75%. I can only afford to borrow 25% of the value of the house. My day job is very low paying. 

I'm glad you had the experience you had a memorable experience, and I hope you have many more in your life.

@Shoshana Shulman - I would be very very wary of sinking every last cent of my available cash into a C+ property in a different country. You have zero wiggle room when something goes sideways - and it will eventually. (Not sure if that $500 cash flow includes allowances for cap-ex- but I hope it does.)

A few comments on your post:

"For that investment of 68,000 dollars, I have half of it in cash, and the other half would have to be a loan. I would earn 500 dollars for that half as well, so now I would be earning 1000, after all expenses, instead of 500."- That's theoretically  before debt servicing on the 50% financing- so your cash flow will in effect be less than $1000 

"I would consider hard money lending, but I need to be 100% sure that my money is guaranteed"- From my experience- there is no such thing as 100% guarantee on HML. Its a high risk business in any event and all the more so for a foreigner without very deep pockets, local knowledge and experience in expensive and time consuming foreclosure procedures.

In short - my advice would be to stay with the current partner (or look for someone else acceptable to buy him out), continue enjoying the $500 current cash flow and look for alternative and diversified places to put your other hard earned capital.

I agree with @Saul L. You should always have 6 months (or ideally 1 year) of cash reserves. If your plan involves taking you below that threshold, then it is not sound, and should not even be considered.

As an example to others considering partnerships: this is a classic example of the problem with poorly structured partnerships. @Shoshana Shulman has had an investor partner for 7 years and now the partner wants out. If this partners sells their share to someone else, she will then have a partner that she did not choose or approve of. This could turn into a nightmare.

Thank you so much for your replies. Just to clarify, the partner does not want out, but I asked if he would be willing to sell me his half, as I am looking for a way to increase my 'passive' income for eventual retirement. This, apparently, is not the way to do it, as I would have no cash reserves.