Partnering By Paying in Full and Giving a Private Mortgage on 50%

David F · 2012-09-11T17:31:41-07:00

I'm a Canadian that has been interested in putting some of my money to work in the US real estate market. I've been talking to a few contacts of mine that have had success with different strategies. One of the people I spoke to has been investing in rental properties in Arizona and managing them on his own, from a distance. He's up to 10 properties and said that now he's been getting people to invest with him. It sounds like an interesting proposition but I'm a novice when it comes to the types of partnership/equity arrangements so I wanted to run his proposition by the community here. Basically, I would be dishing out 100% of the purchase price for the property while he would take a 50% private mortgage from me at 6% amortized over 25 years. We'd both be on the title and moving forward all costs and profits are split 50-50. At the time of an eventual sale, I would get back my 50% that I put in the house plus the balance of what he owes on the loan and then we split the profits. He would be in charge of finding the property, finding the tenant, managing the property. I would also consider value in the the experience to do this once with him with the understanding that I could be involved in what he does so I can learn and then eventually invest more independently. I tried searching to see if this was an arrangement that is common but I couldn't find anything like this. Do these numbers make sense? Another issue I see is that by paying cash I am severely limiting my ability to scale this out but aside from that is this proposition worth considering? David

Ankit Duggal

Specialist · Boca Raton, FL · Member since 2011 · 113 posts · 39 votes

14y

David

Here are my two cents on the structure as I have consulted with many capital investors who have wanted to make investments such as this. The three main areas of concern to me:

1) Why is the entire purchase price of the investment (which is your full equity investment) not being secured as a private mortgage on the asset? This way a portion of your principal is being paid back to you over the asset hold.

2) What is the operating partner skin in the game on this asset? So what makes him care about making the investment perform. Would he collateralize one of his 10 other assets as a security instrument for your capital.

3) 50-50 Split is a little bit generous to the operating entity in my opinion. You are the capital investor and hence have the most risk. You should be getting 60 to 80% of the proceeds (cash flow and reversion)

Hope this helps

Happy Investing

Ankit

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Justin S.

Residential Real Estate Agent · Chandler, AZ · Member since 2009 · 1k+ posts · 928 votes

14y

How is the other investors paying his 6% of the mortgage? From the rent proceeds?

I think the 50-50 split is fair. Acquiring good property is very hard and that is more valuable than the capital. Getting loans on a good deal is fairly simple.

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Ankit Duggal

Specialist · Boca Raton, FL · Member since 2011 · 113 posts · 39 votes

14y

Justin S. This speaks to an agency problem in my opinion hence I was suggested capital investors to get top side when it comes to either cash flow splits or revision percentage. If a operator does not put in any capital then what is the operators alignment of interest with a capital investor other than the time he is vesting into the deal?

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Nathan Emmert

Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes

14y

David, I think you're getting jipped... You put up cash, the other guy doesn't... why is he getting the same return you are?

Someone in the blogs posted about essentially using someone else's credit to get mortgages and paying them 10% or so of the equity and cash flow. While that might be a bit light, it seems to be the same thing you're trying to do and you're paying a TON more. From what I read, you're putting 50% down and he's financing the remaining 50% on his credit through a private investor... for the privilege of using his credit, you're giving him half of everything?

I think you can do better...

One last question, what happens in the case of him defaulting on his mortgage?

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David F

OP

Montreal, Quebec · Member since 2012 · 7 posts · 0 votes

14y

Thanks for the feedback, guys.

Originally posted by Nathan Emmert:

David, I think you're getting jipped... You put up cash, the other guy doesn't... why is he getting the same return you are?

Someone in the blogs posted about essentially using someone else's credit to get mortgages and paying them 10% or so of the equity and cash flow. While that might be a bit light, it seems to be the same thing you're trying to do and you're paying a TON more. From what I read, you're putting 50% down and he's financing the remaining 50% on his credit through a private investor... for the privilege of using his credit, you're giving him half of everything?

I think you can do better...

One last question, what happens in the case of him defaulting on his mortgage?

I apologize if it wasn't more clear. Essentially I would be putting down 50% of the cash and then I would personally be giving him the private mortgage for the other 50%. He then pays me the monthly mortgage payments at 6% while we split all costs and proceeds at 50-50 moving forward.

I suppose that if he defaulted on the mortgage, he would lose his share of the property. The conversation with him was relatively superficial at this point. I wanted to educate myself more before asking him more questions.

Does it still sound like a sour deal?

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Nathan Emmert

Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes

14y

So he doesn't put in any cash, he simply pays you a mortgage for 30 years to pay his share of the "cash"...

To me, cash is king. You're paying cash, he isn't... you should reap more rewards. Granted, for 30 years you get the lions share of the rent between your half and the mortgage payment... but to only own 50% in the end?

Not terrible, but I think you could do better.

How is he planning to pay the monthly mortgage? His share of the cash flow (figure 25% of the rents after the 50% rule for expenses and your 50/50 split) will only cover the mortgage if the property is generating at least 1.2% in rents... I think you're targeting more 1% properties leaving him short every month...

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Steve Babiak

Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes

14y

Originally posted by David F:

...

Basically, I would be dishing out 100% of the purchase price for the property while he would take a 50% private mortgage from me at 6% amortized over 25 years. ...

Just to get the semantics correct with respect to giving and taking when it comes to mortgages: The borrower GIVES a mortgage, the lender TAKES a mortgage. The borrower takes a loan, the lender gives a loan. The mortgage is the security instrument that says that the property will serve as collateral for the loan, and that is why the borrower is the one giving the mortgage.

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David F

OP

Montreal, Quebec · Member since 2012 · 7 posts · 0 votes

14y

Originally posted by Steve Babiak:

Just to get the semantics correct with respect to giving and taking when it comes to mortgages: The borrower GIVES a mortgage, the lender TAKES a mortgage. The borrower takes a loan, the lender gives a loan. The mortgage is the security instrument that says that the property will serve as collateral for the loan, and that is why the borrower is the one giving the mortgage.

Thank you for correcting me. I never knew I had it mixed up. :)

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Partnering By Paying in Full and Giving a Private Mortgage on 50%

Partnering By Paying in Full and Giving a Private Mortgage on 50%

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