Would you partner with this investor? I’m nervous.

Buying & Selling Real Estate
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Would you partner with this investor? I’m nervous.

Account Closed
Flipper/Rehabber · Mobile, AL · Member since 2019 · 49 posts · 35 votes

He is an experienced investor who I’ve wanted to partner with for a while. He seems to be very successful. He is asking for $100,000 Hard cashup front. Looks like return is 8% cash on cash. I need guidance. These are the details:

64 unit complex $2,375,000.00

Total loan amount $1,995,000.00

Down Payment $380,000.00

Upfront repair costs $300,000.00 (all new roofs, curb appeal, and vacant units)

40 2 bedroom @700.00

24 1 bedroom @600.00

Gross annual rental income $508,800.00

10% vacancy $50,000.00

Effective gross income $457,920.00

Expenses:

Insurance $12,000.00

Taxes $11,800.00

Utilities $60,000.00

Dumpsters $9,000.00

Accounting $7,000.00

Maintenance Reserves $38,000.00

Management $40,500.00

Total expenses $178,300.00

NOI $279,620.00

Financing $154,245.76

75 / 25 split Roughly $94,030.68 / $31,343.56

8% cash on cash return for investor

$10,000.00 needed up front and the remaining at closing

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Bryan Devitt
Contractor · Oxford, MA · Member since 2018 · 807 posts · 745 votes
7y

Business relationships are like marriages, if you're questioning if you should do it, don't do it. Maybe it turns out good, but maybe it turns out horrible and it is a very messy, expensive and drawn out divorce. Is the risk of the second worth reward of the first?

17Reply
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  • Jake S.
    Rental Property Investor · MN · Member since 2017 · 864 posts · 555 votes
    7y

    Hey  @Account Closed!

    What type of debt is he getting on this to get a 85% LTV?

    What's the projected refinance/hold period for the investors?

    What's the projected NOI after improvements are made? I'm assuming investors get 75% equity correct?

    Is there a preferred return for the investors? If not, why?

    Why does he need $10k upfront? 

    12Reply
  • Rob Beardsley
    Rental Property Investor · New York, NY · Member since 2017 · 300 posts · 168 votes
    7y

    Hi Mindy, the numbers high level look pretty good ~18% project level cash on cash return after stabilization. Trust/confidence in the sponsor of the project is the most important part of the deal. 

    @Jake S. Since the raise is pretty small, $100k is a significant amount of the deal and therefore it wouldn't be totally unreasonable to request an upfront deposit. I agree, the 75/25 split should include an 8% preferred return. 

    7Reply
  • Bryan Devitt
    Contractor · Oxford, MA · Member since 2018 · 807 posts · 745 votes
    7y

    Business relationships are like marriages, if you're questioning if you should do it, don't do it. Maybe it turns out good, but maybe it turns out horrible and it is a very messy, expensive and drawn out divorce. Is the risk of the second worth reward of the first?

    17Reply
  • Henry Lazerow
    Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
    7y

    There are many much less risky ways to make 8%. You can easily make that in Cash on Cash owning a class A or B rental on a fixed 30 year mortgage. You are basically giving this guy 100% leverage by letting him borrow the down payment to take out more debt which is high risk for a not very high risk return. 

    Also like others mentioned if doubting the partnership upfront don't do it. 

    13Reply
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    OP
    Flipper/Rehabber · Mobile, AL · Member since 2019 · 49 posts · 35 votes
    7y

    @Jake Stuttgen I’m meeting with him Tuesday evening. I’ll get more details then. Honestly, I don’t know where to start with all of this....

    0Reply
  • Account Closed
    OP
    Flipper/Rehabber · Mobile, AL · Member since 2019 · 49 posts · 35 votes
    7y

    @Kealoha Pilares Thanks for your input! Seems clear...

    0Reply
  • Account Closed
    OP
    Flipper/Rehabber · Mobile, AL · Member since 2019 · 49 posts · 35 votes
    7y

    @Bryan Devitt I Question every deal. I’m a natural worrier. Geez... Comparing it to marriage?? Lol def don’t wanna do that!

    4Reply
  • Account Closed
    OP
    Flipper/Rehabber · Mobile, AL · Member since 2019 · 49 posts · 35 votes
    7y

    @Henry Lazerow Thank you for your reply. I’ve never partnered with anyone on investments. I’m a doubter in every area. Ugh...

    0Reply
  • Account Closed
    OP
    Flipper/Rehabber · Mobile, AL · Member since 2019 · 49 posts · 35 votes
    7y

    @Kealoha Pilares It’s not necessarily about being “HIS” partner. I’ve done a few flips myself. It was a headache. I made descent profit though. Partnering with someone who does all the rehab work and I just get a check seems like the way to go...

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    as others have mentioned its not common to do these deals with only 15% down.. that would cause me to look deeper.

    maybe.. but its not common.

    and who gets the 25% and who gets the 75%  assuming you get the 75%.

    Podcast Guest on Show #222
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    3Reply
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    OP
    Flipper/Rehabber · Mobile, AL · Member since 2019 · 49 posts · 35 votes
    7y

    @Jay Hinrichs obviously I need to ask more questions when I meet with him. This whole situation makes me never want to partner with anyone....

    2Reply
  • Jason Graves
    Rental Property Investor · San Diego, CA · Member since 2018 · 242 posts · 234 votes
    7y

    @Mindy Rowe

    The other option is not to partner and buy something yourself.

    Where do you live?

    I’m in San Diego but have been buying in Kansas City MO

    1Reply
  • Clayton Collins
    Real Estate Agent · Fort Worth, TX · Member since 2018 · 24 posts · 13 votes
    7y

    @Mindy Rowe

    You’d be a general partner in the 25%. Passive investors get the 75%. If he’s doing a preferred return, the passive investors or limited partners as they will be are getting the first returns before you get some returns. There are benefits on being a general partner or the limited partner and it depends on your goals. Most people become a general partner to get the sponsorship needed for a high loan amount and recognition for getting current and future investors

    2Reply
  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    7y

    The quoted operating expenses seem awfully low.  $11,200 in annual property taxes on a $2.3 million commercial property?  Where do you live?  

    4Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    7y

    The reason you are likely nervous is because of the unknown and not being aware of the risk factor.  What is the worst case scenario and are you ok with it?  Protect the money first and make money 2nd.

    4Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Account Closed:

    1.  Successful men dont need to raise $100k from a secret admirer.

    2..  My sister says never ever do Business with any man one on one.  Pheromones are just so daRn unpredictable.

    3.  At least take Dad to your meeting.

    4.  Hire a PI do do a personal background check.

    Other than that you are good to go...................lol.

    boy this sure was in thoughtful in depth post with a ton of great information that is actionable..  but I do like the PI background you don't need a PI there are plenty of companies for 50 to 75 bucks that will run background.. and that is something investors for what ever reason just don't do on other investors and sponsors.. they do it on tenants who are going to pay them maybe 12k a year in rent.. but don't do it on sponsors they are going to hand over 100k or more to. 

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    17Reply
  • Account Closed
    OP
    Flipper/Rehabber · Mobile, AL · Member since 2019 · 49 posts · 35 votes
    7y

    @Jason Graves Thanks for the input. I’ve bought a few residential properties myself. I’m in Mobile, AL.

    1Reply
  • Account Closed
    OP
    Flipper/Rehabber · Mobile, AL · Member since 2019 · 49 posts · 35 votes
    7y

    @Kealoha Pilares Lol.... He has several other investors partnering with him on this. He’s not a secret admirer.

    0Reply
  • Account Closed
    OP
    Flipper/Rehabber · Mobile, AL · Member since 2019 · 49 posts · 35 votes
    7y

    @Darius Ogloza Mobile, AL

    0Reply
  • Account Closed
    OP
    Flipper/Rehabber · Mobile, AL · Member since 2019 · 49 posts · 35 votes
    7y

    @Ian Walsh Good advice! Thank you!

    0Reply
  • Account Closed
    OP
    Flipper/Rehabber · Mobile, AL · Member since 2019 · 49 posts · 35 votes
    7y

    @Jay Hinrichs I agree with background check. Good advice!

    I don’t really like the part about taking my dad with me. I’m not 12. I don’t need my dad to babysit me... ugh...

    7Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Account Closed:

    @Jay Hinrichs I agree with background check. Good advice!

    I don’t really like the part about taking my dad with me. I’m not 12. I don’t need my dad to babysit me... ugh...

    that person is a troll..  and or thinks they are funny.. just ignore.. there are a few like that on BP..  there are inconsistencies with the numbers that you presented..  sit down with a very good commercial broker who specializes in those assets could be a good thing as well. they will know the numbers inside out and can give you feedback in 15 minutes … IE  a commercial broker in the market were the property is. 

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    3Reply
  • Tanner Marsey
    Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes
    7y

    Trolls on BP.... strange spot for that....

    Anyways, 8% I’d probably pass but that depends on your situation. If you have a few 100k in the bank that’s just going to sit there I would vet this guy a bit more and make sure all your questions are answered and if it still seems good then go for it. If these funds are tied up causing you to miss out on other potential deals I’d pass and maybe try and realize better returns.

    0Reply
  • Michael Zau
    Specialist · Escondido, CA · Member since 2008 · 60 posts · 21 votes
    7y

    Investor:  someone or entity that invests money into a project, has done due diligence in research, has an equity or stake in which there is an expectation of return, however understand that there could be a loss.

    Partner:  someone who has investment of time, energy and input so that the final outcome shows a return of time.  Money may be an expectation, however may not be in the final outcome.  This person may or may not have an equity stake in the investment or property.  

    After reading a few posts, it seems he is looking for investors and not so much a partner. 

    2Reply
  • Nate Marshall
    Real Estate Consultant · Evergreen, CO · Member since 2018 · 1k+ posts · 734 votes
    7y

    Mindy

    You should do some due diligence. Stress test the numbers. Try to anticipate a market contraction. Also. I would ask for the T12, Rent Rolls and last 2 years of P&L's. Look where your investor and you can add rent income and where you can cut expenses. Look at the property manager. Are they effective. Do they respond quickly to prospective tenants? Do they outsource maintenance and do they mark maintenance up?

    4Reply
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