Is the private money buying equity or is it a loan?

Question

I am looking at potentially partnering with a family member on a deal. We're talking about a 50/50 split where he would do all the improvements and get the bank financing while I bring the downpayment and closing cost. This would be a buy and hold property and not a flip.

I know there isn't really a "normal" here but what would be expected if you were the one bringing the cash? Would the cash be a loan or would it be to buy equity and you only cash out on the sale of the property?

Lee Judd · Answer

@Jason Lam

I have a similar deal with a family member but in reverse. They put up the money and I found, financed and manage. We created an LLC and each own 50%. I used a local bank for the financing so they were willing for the LLC to hold title and I guaranteed the note.

Jerel Ehlert · Answer

There are lots of ways RE transactions have been capitalized. What you described is fairly common, especially among family. More difficult for SFR because conventional financing wants the human on title. Easier for you and the other to from an entity, and have him sign a resolution stating that though the property is in his name, it is the entities.  You can also have the entity take a small 2nd lien against the property so it can't be sold or transferred without getting the entity's permission (clouds title).

Thing is with these deals, they are easy to get into, but hard to get out of.  Resentment may build when all your obligations are over very quickly, but the other must continue to perform (managing the rental), to continue to earn profits.

This can be structured as a loan to be paid off or equity, but equity is more common.

Jason Lam · Answer

@Kenneth Garrett Thanks for the response. I figured that was the case and that would I would be doing is a little unorthodox where I would put cash in on a buy and hold. Doing a mix like option 3 might be a good fit for this one as it will allow me to pull out the majority of my money but still keep an equity stake in. I would rather know the risk I am taking and lose money than to have to try to foreclose on a family member in the event something went south.

Account Closed Thanks for your response. You're a few steps ahead here but yes I would be on the deed so there is no issue there. I was more inquiring on the best way to structure a deal where I want an equity stake and I'm paying in money. If it should be a loan or just a simple equity stake where I get paid 50% of cashflow but can't get my investment out until we sell.

Account Closed · Answer

I think you should talk to a lawyer.

Account Closed · Answer

I'd want to be a partner - 50/50 ownership.  I personally would not give somebody the money to buy a property, and then let them be the only name on the deed with the possibility they would blow me off and then keep the property.

If your relative isn't okay with that, then I don't think you should give them a dime.  Because you have to wonder why?

You can love someone and also be wise at the same time.  You don't do anyone any favors in life if you take up their life consequences for them.  In the real world, you don't get to buy properties without any skin in the game.  So, if you give them your skin, without putting them in a position to lose any themselves if they don't act responsibly, and then only you suffer the consequences - you haven't allowed them to learn any real life consequences for their behavior.  That's not doing them any favors, and is definitely not a wise thing to do yourself.

If you're not comfortable with that, then just give them the money and call it a gift.  And then, let them take the consequences as far as having to pay taxes on it :-)

Kenneth Garrett · Answer

@Jason Lam

There are two types of private lending.

A debt lender who receives interest from the money borrowed.  In some cases a point or two as well.  There funds plus interest are returned upon sale or refinance.

An equity lender who receives a percentage of the deal - typically 50% but it can be any percentage agreed to.  This type of lending is typical for fix n flips.  50% of profits.

There is a third option where it can be a combination of debt and equity.

Is the private money buying equity or is it a loan?

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