Structuring A Deal: Where Do I Start?

6 Replies

Hey everyone! It’s been a while since I’ve been here and I’m in need of some advice. We have a friend who approached us about becoming a silent investor in our next deal. He’s seen the success we’ve had in the last 2.5 years acquiring 4 two-family homes and wants to put some of his money to work. Before finding the deal, we sat down with him so that we’re all on the same page and so that we’re all aware we will have legal documents in place to finalize everything. He’s looking to invest into our next deal $50-$75k and wants a 15% return on his money. Fast forward, we found a great deal in the area we invest in. Purchase price is $240k for this two-family. The mortgage will be under me and we will be coming up with the 25% down payment and closing costs. We estimate the house will need about $60k in renovations. My question is, how should we structure this deal? I’ve read a lot about this, but quite frankly we’re a bit confused and don’t know where to start. This will be our first time structuring a deal so any advice would be great! Thanks in advance!

There are a lot of ways to do it - some legal, and some not so much :)

Which way you wanna go?

There are a million ways to structure deals but to me the point of using other peoples money is so you can hypothetically be in a no money down situation and put your money to use elsewhere.  If you are paying the down payment and closing costs why do you need him at all?  

@Ben Leybovich Legal of course, lol! We're planning on getting all the right legal docs in place so that we're all protected and there is no confusion on how this partnership will work. Any suggestions on how to structure this deal?

@Andrew Michael We need him, or someone like him, for the rehab of the property and any future properties we acquire in the future. We've been using the BRRRR strategy on our last few projects, but with someone like him we don't have to wait 6-12 months to cash out- refinance. Essentially, we're looking to acquire properties faster all while working smarter, of course. Any suggestions on how to structure this deal?

First just to clarify, is this 15% simple interest annualized?  Also, when you say "we" are covering down payment and closing costs does that include this partner or not?  How long is his $50k-$75k loan for?  Is he expected to be paid back in 3 months, 12 months, 5 years, etc? Is he expecting to secure his money against the property?

There are bank loans where upon you can get rehab money as part of the loan.  These often come with a long and tedious processes but the option is there.  In addition, you can get a hard money loan (which would include rehab money) and then refi into a long term loan.  You would have to factor in the additional hard money costs but at face value both would come with rates cheaper than 15%. 

@Dalwin Garcia After re-reading your last post I think I am getting a better idea but perhaps a phone call would be best to make sure I am understanding all the pieces correctly.  In any event it sounds like you have a chunk of money to play with.  Why not put that money down, use one of your previous properties as collateral, and get a acquisition/rehab loan.  Once the rehab portion of the newly acquired property is completed now you have built in the equity.  Then its simply refi, rinse and repeat.  Again with his money it would allow you to scale faster but if you have liquid cash, performing assets and equity in those assets you have more borrowing power than you realize.      

Where this strategy really becomes interesting is once you have a property free and clear you can basically get 100% financing as long as your willing to collateralize the property.  I am currently doing this with several clients and they love it because rather than refi'ing and using that money as down payment I am collateralizing saving them thousands on closing costs and saving them tons of time in the process.  It's just a continuous rolling of equity into the next project if that makes sense.    

Thanks! @Andrew Michael

We've used the BRRRR strategies multiple times and its awesome! Like I mentioned before, the waiting is what is killing us. So with our silent investor we could, in a sense, speed up our rate of acquisition. This person is sitting a lot of cash so if this first deal goes well, the sky's the limit for us!

He's looking to make at least a 15% return on his money and he wants to receive a check every single month. So I'm just wondering how to structure a deal with someone like him so that both parties benefit and are content.

Some scenarios we have ran through are possibly a 60/40 split on cash flow. Rents in our area are really good so that potential split could possibly equate to a 15% on his investment. Another scenario is paying him 15% every month (principal and interest) regardless of cash flow on the property, so kind of like a loan. He's also interested in reaping some tax benefits as an investor/partner in this deal.

We want him to remain a silent investor because we don't want him to have a say in the day to day details, you know?

Again, we're in the preliminary stage, trying to iron out all the details. I currently have the house under contract and scheduled to close in the next few weeks.

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