I am an investor and I have several people close to me that would like to invest their money with me through partnerships. After tearing through the forums on BP and many sites on the internet I still don’t know what would be a good deal structure. So I made up my own and I would love comments and answers to these questions:
Does this deal seem close to normal?
Does this deal seem fair to all parties?
Any comments at all would be greatly appreciated.
The deal: My investor(s) put up 50% of all up front costs (down payment, closing, minor initial repairs), I put up the other 50%, I manage the property and take on any future costs for repairs or improvements. In return my investor(s) get 15% on their initial invest each year plus 50% or the equity. I get the rest.
Example with numbers: 600k 12 plex , we each put up 60k down, investors get guaranteed 9k every year and half the equity. I get 35k every year and half the equity. How does that sound from both ends?
Thanks for any advice!!
@Eric Allgeier If you’re going to give up half of the equity you should only be paying a 6 to 8% preferred return to the investors not 15%.
You could easily raise the same capital and pay only a 6 to 8% preferred return with no equity.
All future maintenance and repair cost should come out of the operating income of the property before any equity distribution’s. You should not be paying for those cost 100% out of your share.
I completely agree with @Greg Dickerson . Run through worst case scenarios in that situation and I think you are going to get the short-end of the stick and not want to continue that partnership.
Maybe consider 50/50 of initial funding and you get a management fee or you have above 50 percent equity in exchange for the management.
I've been trying to figure this out too. What if the "investor" you find puts the whole 120k down and you secure the loan. You give the investor 6-8% return on their money only with no equity split? You do all of the work and only need them as a money partner. This was kind of the structure I was thinking of doing. I was thinking of having their 20% secured by the property in a 2nd note but I don't think most lenders would allow this. Would this be structured as a LP where the investor is the limited partner and you are the general partner? Or would it be better to do an LLC?
Tons of ways to structure deals. If the investor sponsor is inexperienced than many have to do whatever they can to get started and then go find better investors not wanting as much return or restructure future deals.
I would stay away from GUARANTEES. There are NO guarantees when it comes to investing.
A preferred return of 6 to 8% is common but many factors come into play. You can have land entitlement investors for one stage, new development investors for another stage. Existing properties you can have fully stabilized properties, half stabilized, completely vacant, etc.
Some give no cash flow upfront, some give a mix of cash and equity upside, others have little cash flow but much more upside on the back end. I find my ultra high net worth investors (tens of millions or more) really do not care as much about cash flow as they make tons already and just more taxes to pay. They care more about equity growth on the back end and outpacing inflation. It's the investor that might make 60k a year from their job but had real estate gains and now worth 2 million that really want cash flow off of the investments with the sponsor.
Best way to talk to a lawyer about your goals. There is no "off the shelf" document that will work otherwise.