Silent Partner Rate of Return?

Question

Hey all. Its been awhile since I have been on here.I lost my job and about lost it all trying to start my real estate business but now Im back and ready.I have a silent partner that is going to invest $50,000 in my real estate company. He has given me 5 years to pay him back and is interested in splitting the equity on my properties at this time. What would be a common return for this type of deal. I have never done this type of thing and want to be fair to both parties since he is fronting the cash while I do all the work. Does a 50/50 deal sound good for a 60/40? Just wanted to see what others have done in the past. As always thanks

Michael P. · Answer

Since you are a beginner I think 50/50 is way fair for you.  Think of it this way.  If someone approached you and said hey I will lend you some money but I want a 50% cut.  You would jump at that offer.  What other means do you have to get into the game?

I am pretty surprised someone who has 50k is just gonna give it to you and say alright go at it boy.  I bet when it comes down to it this guy will require some contracts and paper work.

This is how I would approach it.

You do "One Deal".  That is it.  After that one deal is done you figure out what the profits were.  Hopefully there were profits.  Say you now have 60k.  55k is returned to the investor and you now have 5k in your pocket.  At this point both parties can evaluate if they want to move forward with another deal.

That is the only way I would consider loaning out money.

Don't get greedy...

Jon Holdman · Answer

Oh, by the way, congratulations for speaking up and finding a potential funder.  For anyone looking for private money, now you know the method.

If you'd like, Tyler and I can sell you a DVD where we dress in suits and say that 100 times.  Normally $2999, but a special today only for BiggerPockets, its only $999.  That's a joke.

Jon Holdman · Answer

Hard money lenders for someone doing a rehab are going to charge 0-6 points and 12-18%.  On a typical (is there any such thing) rehab, I'd figure about 10% of the amount borrowed.   If you borrow 70% of ARV, that's about 7% of ARV.  Six months would be a good time frame.  If you buy right (buy plus rehab at about 70% of ARV), your profit should be in the range of 10-15% of ARV, maybe even 20% if everything goes well.  Splitting the profit 50/50 would give your investor somewhere between 8% and perhaps as high as 13% of ARV, or roughly 12-20% return on his money.  For six months, that very nice.  You're giving up a big chunk, but make that work, and you'll have no problem funding future deals.

But what are you trying to do?

I agree, Vikram, that a 10-15% return for a speculative venture would be inadequate.  That's why I suggest a shorter time frame.  Further, real estate investing isn't venture capital.  VC's are betting on an idea.  They have no recourse, and a good chance of losing everything.  So, they want to see a much higher payday, even 10X, if the idea is successful.  Investing in a rehabber is much lower risk.  The worse that can happen is you get a house that's incompletely remodeled, and you have to put in some more money then sell it or rent it.  Unless you totally take your eye off the ball, the worst case downside is much less than losing everything.

Tyler, just structure this as a loan.  If you create a liability, its yours, not the lender.

Tyler Carpenter · Answer

Sorry Vikram. I read your statement wrong.

Tyler Carpenter · Answer

Would I be the 55%? and the investor 45%? Because orignally i was throwing around this ballpark number

Vikram C. · Answer

Jon, I understand what you are saying about the difference between HML and VC.  But HMLs normally expect the borrower to put in 20 to 30 percent whereas that does not seem to be the case here.

Scott Hubbard · Answer

Since you are flipping, I agree with Jon and others that you will need to give him a bigger split since it is much more speculative.

55/45 is a nice number as it will give you voting control.

Tyler Carpenter · Answer

Ill give you a little bit of a background as this is a little bit different than what most of you have been through. In feb 09 I lost my job and moved back home with my rents to save money. After painting fences for extra cash for a friend of my moms, I was hired as an engineer for her son at ballco manufacturing. I became the quality control engineer there and have been there since august of this year. I have been asked to work extra everyday and wanted the owner of the company to know what i do when i leave work and on the weekends. I wanted him to know so that way he realizes im not giving up on my dreams regardless of any job. After talking about real estate and my goals with the owner of the company, he became interested and wanted to learn more. I presented him with my offer of a cash on cash return in a year or two and pay him back in full. I think his style of thinking is a longer term and has given me 5 years to figure it out. This is where I am at. He has reserved the money for me once I have a contract that dismisses his involvment if anything gets hairy.

So everyone is in concenous that I should try to pay him back as soon as possible? At what rate would you provide? 50/50? Is that fair?

Silent Partner Rate of Return?

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