Private Investor Obtained - Need Help With Property Criteria

[Adam E.]

This is only my second post on the forum, as such, if I posted in the wrong section, please let me know. I have both a private and a conventional investor. Here is my current arrangement:

Local bank for 80% of financing and private lender for 20% down payments. Private investor does not participate in the management of property. Only contributes monetarily. I keep all rent/cashflow. However, I am responsible for all maintenance, management, repair, tax, insurance, and deb service. Private investor gets all depreciation write-offs. All loans are 15 year fixed. Interest for both notes is standard for market.. At the end of the 15 year term, private investor and I split equity 50/50. 

Obviously, I have interest in cash flowing properties. The more net cash flow, the more money I can keep every month. My first deal is a $80k triplex with gross rent of $1,500 monthly. It does decent cash flows. I won't get into too much depth on the numbers of the property, because I have come to the realization that this may not be the not the ideal property for my financing arrangements. My private investor wants the tax benefits, and frankly, a eighty thousand dollar property is not much yearly depreciation. However, when I look at other properties, even commercial, I see that a 10-cap might not work with this arrangement. There are not a lot of 2% rule properties in my market. The properties that do cash flow well are small ($125k duplexes etc). However, I can find decent 200-700k properties that have 10-12 caps.

First, do you think this financing arrangement is even going to work? If you had this financing, what properties would you target and why? What criteria would you put on the properties?  Would you sacrifice the monthly cash flow for the equity play? 

Thank you for your time and thoughts!

[Hubert Washington]

@Adam E.

As far as the structure of your arrangement, you have the opportunity to get in a deal or several deals with no money from you. Sounds like a win to me! Your market will determine how much you have to pay for an asset and the 2% rule doesn't work in every market. I would go as big as you and your investor can qualify for with regards to net worth and liquidity. But once you get into 5+ units, it becomes a different game so be prepared to spend some considerable time learning the apartment sector before getting into a deal (there are a ton of great resources available). Otherwise buy as many 4 units as you can find where the numbers work. Are you planning to manage the properties yourself?

Best of luck on your journey!