Partnering on multi-families

18 Replies

I know how partnering on flips works, but I'm a confused on how having a parter on a rental works to everyone's advantage. Is waiting longer to recoup funds in an investors best interest?Here's an example:

Property cost: $100,000

Investors in for 20% or $20,000

Buyers Conv loan: $80,000

This is a hypothetical situation. There are a few MF in my area. I have some funds but would think about an investor if I knew how to structure a mutually beneficial repayment deal.

It's pretty basic. Each investor contributes $X to the deal, and you split up the returns however works best. Some investors want cash flow now, so they might be happy with more cash flow. Some want equity, so they get a bigger slice of the pie when you liquidate.

Basic, oversimplified example: $1 M deal.  4 investors pool funds for the 20% down payment ($50K per investor).  Each gets 25% of the after expenses cash flow paid out quarterly.  In 5 years, you sell for $1.4 M and split the $400,000 profit 4 ways: $100K per investor.

There are a hundred variations on that. Maybe 2 investors want cash flow and take a larger percentage of monthly cash flow today, but in exchange give the other 2 investors a larger share of the profits from sale. Or vise versa. Maybe all four investors agree to plow all the cash flow back into fix up/loan amortization and take no cash flow for the first 2 years.

The limits are as broad as your creativity and the desires of your investors.

@Daniel Townsend this is the beautiful thing about real estate, you can structure the deal any which way. Normally the guy who brings most of the money either takes a larger split of gets a pref on their money before you as the sweat equity would participate in the cashflow or upside in the deal. For something small and simple I'd probably try to do like a 70/30 or 80/20 split.

@Daniel Townsend A lot of your structuring also depends on the involvement of the partners. For instance, early on in my investing I partnered with a guy on several rentals and contributed $0 by being the boots on the ground (I provided the off-market searches for property, project and property management, and all day-to-day tasks to keep up the property). It was to the advantage of us both because when I jumped into this after college, I had very little in terms of liquid cash, but a lot to offer in terms of time, effort, and market knowledge. My partner was flushed with cash but was not real estate savvy and was running a compound manufacturing business full-time. It helps looking at both sides, analyzing the numbers and when you come up with something, put the shoe on the other foot and ask if you would go for this if you were in that persons position. It's at least a good place to start. But partnering on rentals is how I've been able to finance my own deals now. Good luck!

Originally posted by @Daniel Townsend :

@Scott Morongell yeah, sweat equity is what I would be able to contribute. It sounds like a conversation with the investor on their expectation of the deal and perhaps compromising.

 The better question is to ask what kind of return they're looking for. Based off what they consider an acceptable return will then determine how much you get to participate or pay for the deal. 

@Daniel Townsend

I’m about to close a 6plex for 180k with current rent 2900$, which can be increased to 3900$

I have to put 20% down (around 38k) plus rehab capital (20-30k) to turn it into a 8plex and making much more cashflow 4700$ a month.

The way I structured this deal is: I bring the deal, the lender, do all the work until refinance, I will own 50%, investor who put 20% down+rehab money will own 50%.

It's a BRRRR so the goal is to refinance and get out most of the money and then get cashflow or sell later to pull the equity out!

@Daniel Townsend

Yes they’re the passive capital partner of the deal, I’m the operating partner.

I got 4 people I know considering it but this is my 3rd deals ever so I don’t know many investors yet. One decided to put 1/2 of the money and get 25% of the deal though.

I’m willing to do that to reserve my cash for more deals!

@Daniel Townsend , you can negotiate it however you like, but yes, 20% cut of free cash flow would be one appropriate way to distribute returns to someone who puts 20% into the deal.

It doesn't have to be that way, though.  Maybe two investors each put in an equal %, but one wants a larger share of cash flow now and another wants a larger share of the sale price later.  It all comes down to what your investors identify as their goal and what they are satisfied to receive.  There's nothing written in stone that says "every dollar must be treated precisely the same".  That said, I wouldn't make a habit out of stacking the deck grossly in favor of one investor over another.  They sometimes talk shop, and investor B might be unhappy if he finds out investor A is better a larger share overall with no mitigating factors.

@Erik Whiting every comment on this thread is expanding my understanding of creative financing. I had not calculated the end sale of a rental into a negotiating point for an investor. Thanks for the info!

This makes me want to talk with my attorney to further explore these options.

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