A good investing strategy for rental properties?

Question

I'll lay this out as briefly as possible. I would like any advice/opinions on how we're going to proceed. If anyone has a better idea on how I should proceed with investing in rental properties, please share your ideas.

We're going in 50/50. I'm the money investor. My partner brings to the table his expertise and does the work ( finding the best deals, purchasing the property, overseeing reno's, lease agreements with renters, collecting rent, paying the insurance, property tax etc), he does all the baby sitting associated with the rental property.

I'm act as "the bank". When my partner finds the right property to purchase, I loan the money back to our partnership, as basically a mortgage. An example scenario we ran with the bank president was if we purchase a rental house for $40,000. I would loan the $40,000 over 10 years @ 4%. The rent would cover paying back monthly principal & interest to me, plus insurance and property tax. The little bit left over would be put towards future renos etc. If we need more money, which we will, for reno's, I would issue another loan to the partnership to pay for these.

From this partnership, my partner is benefiting by building equity in a property that he didn't have to spend a dime on,, but he does all the work associated with it. Once the property is paid off, the monthly net income split between us will be a nice little income. Someday when we decide to sell the property and split the money 50/50, that's when my partner will really benefit.

On my end, I have this money that I've worked hard and saved up all these years. It's doing hardly anything for me sitting in my bank account, earning almost nothing in interest. So I'm benefiting from being " the bank", earning 4% on my money, plus half the monthly net rental income, which will be a bit of money in the future after the house is paid off, and half the money from the house someday when we sell it.

Is there a better way to do this investment??? We have a bunch of things to figure out with the lawyer. I want to cover my butt. I won't be here to see what's happening with the property. My biggest risk is the trust I'm putting into my partner to do everything as according. I'm not sure how to have everything written up in our partner agreement so I can cover all areas. I'm excited and nervous! Any opinions or ideas on what I've described?

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Christian Becker · Answer

@Curtis Woloshyn

You’re getting a bad deal I think.

One of my silent partners puts in the cash for money down and remodel and gets 50% share in the business for the next 10 years in return.

Another one who just furnishes hard money gets 12% per year and another 2% each time up front I use the money. He acts as my bank for my own deals.

Huong Luu · Answer

@Curtis Woloshyn There are so many other things you can be doing with your money than doing this deal and only making 4%. From what you wrote, it sounds like the money is burning a hole in your pants. Don't be so quick to invest it without really doing your homework. Do your check on your partner. If they are okay with 0% income until the mortgage is paid off or until you sell, then this reads like 'the blind leading the blind'. It will take about 5-7 years before you will make a dent in the principal payments. You will not be leveraging OPM to get more properties. I would suggest you team up with an experienced RE investor who does JVs.

You will also be splitting any negative cash flow. Ensure your terms include buy out, 1st option to purchase, property management fees, change in rates, etc.

To answer your original question, what else can you do:

1. max out your TSFA and make good investments

2. max out your RRSP

3. look at RRSP mortgages for this deal

4. private lending

5. MIC

6. find other RE investors who will give you a higher return now

7. self development (specifically the rule72 and compound interest)

Good for you for taking action thou. After it is all done, record all your learnings.

Dennis M. · Answer

Your plan may be not as profitable as many in here would want but it’s still better than 95% of the public’s plan . I don’t see anything wrong with making 4% and owning 50% of the equity . Granted It’s not great but still being a newbie and having your free time is a huge benefit plus you have a equitable position of the what the property gets . Is The headache of managing that property worth the difference of 4-10% of 40 grand over the next few decades ?

Becky Ho · Answer

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Curtis Woloshyn · Answer

Ok Basit, so I'm open to the idea of being the " money investor", and just putting up the money for the down payment/closing costs, and then the "working investor" secures the loan from a bank in their name, they do all the managing /work associated with the property,,, and we're 50/50 partners on all profits/losses/sale of property in future,,,and I get my down payment paid back, variety of ways to do that,, the question is,,, and I'm a rookie to all this,, but if someone else has the loan in their name,,, and I put up the money,, on the property deed, do we both have our names on it as 50/50 owners? How do people do these deals when they might live thousands of miles apart? Do I have to show up in person and spend time in the area where the property is? I'm a Canadian, so theres the whole other issue with taxes for me in Canada, I can not directly have income earned in a US LLC because it will be double taxed for me as a Canadian citizen,etc, ,,I really want to invest in the US as theres so much more opportunities,, just want to make sure I do it right the first time

Basit Siddiqi · Answer

@Curtis Woloshyn

It is okay if the bank is making interest. Interest right now is historically low.
You have to be in the mentality that it is okay for others to make money. You should just focus on which route will give you the best return.

The current deal you have is bad.

Curtis Woloshyn · Answer

Hey Christian D, I'm looking at scenarios if I just did it the traditional way, put a % down, and get a mortgage to purchase, obviously more properties could be purchased this method, but the bank is making the interest, not me. I need to crunch more numbers and see what makes sense.

There are several reasons why I want to partner with my friend. He's been living off his rental properties for 3 years, that's his job, nothing else, so he has the experience in buying and managing rental properties. He's born and raised in the area, and has a knack for for negotiating the lowest price on not just properties, but everything he buys,, just one of those types of people. I'm from Canada, and property values are ridiculously high,, up there the numbers do not add up to buy a rental property versus the rental income they bring in,, it would take forever to pay off one property,,, so I want to buy in the US where property prices are way lower.

Christian D. · Answer

Hey Curtis, ya man...that makes sense. We obviously can’t predict the stock market, but same goes for RE. Can’t know what the house will be worth when you go to sell it either. Sure you’ll have cash flow, but it sounds to me like you’re taking all the risk for 50% of that. I guess it would remain to be seen what the coc return would be and how good of a deal he could find.

You’re the judge of how much risk is worth your reward. You could put that money into CD’s and earn 2% on it risk free with the same tax structure. Assuming you’re not maxing out both a 401k and Roth IRA, you’re also ignoring opportunity cost to take advantage of some serious tax deferrals or tax free earnings. I dunno. I’m still new to this too! Haha. But to me it seemed worth it to play devil’s advocate.

Curtis Woloshyn · Answer

Hey Christian, I guess it's a long term approach. I could take that money and buy dividend stocks in the over priced stock market that pay 4-5% and in 10 years what's the value of those stocks? Higher or lower, than my initial purchase price? Nbody can predict that. What I do know is that I've made 4% on my money over the 10yrs, I'm only getting taxed on the interest earned, not the principle that is getting paid back to me monthly. If there's a bit of money left over each month, I would be getting taxed on my half of it. But once the house is paid off in 10 yrs, the monthly cash flow is greater, and I've recouped all my money back, and made 4% on it. Then when we decide to sell, that money is split 50/50,, so that will be a good chunk of change. But if I can do this a different way that will benefit me,, I'd like to know.

Christian D. · Answer

I’m brand new to this, but that seems like a lot of risk for 4% ROI. Will you be taking a hard look at the numbers to see if the property will cash flow well?

How will your loan/interest income be taxed?

Will be watching to see what the more experienced people have to say!

A good investing strategy for rental properties?

A good investing strategy for rental properties?

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