Investor · Washington, Washington D.C. · Member since 2014 · 96 posts · 39 votes
I browsed around a bit but didn't see anything exactly on point, so thoughts welcome.
I am working with a family member, with whom I own a separate property. We will have an LLC. I will be doing ALL of the work, from finding properties, contracting, legal, managing, etc. I also provide 50% of financing.
Family member is a "silent partner." Effectively, he will serve as a co-signer on non-recourse financing. (For example, we intend to apply for a HELOC secured by our jointly owned property). Other than serving as a co-applicant for certain financing, my family member will have no other role.
Question: What percentage of the TOTAL business (profits, eventual equity, etc.) is fair for the family member given this scenario? Stated differently, what percentage of the LLC should he own?
Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
12y
I think the reason you're not getting more response is because your question is really hard to make sense of. I have never heard of a non-recourse heloc, despite what the oracle google says ;) and the very concept seems bizarre to me. The idea of having a co-signer on a heloc also seems really strange.
Perhaps you can step back and re-phrase your explanation what you are trying to do -- for instance, who's house is the heloc on?
Investor · Washington, Washington D.C. · Member since 2014 · 96 posts · 39 votes
12y
@Tom V. Thanks. I think that's sort of the point. We're trying to AVOID major negotiation by trying to figure out the rough "going rate." Trying to keep it friendly AND fair!
Investor · Washington, Washington D.C. · Member since 2014 · 96 posts · 39 votes
12y
@Wayne Brooks I am (perilously?) trusting Wikipedia:
"Non-recourse debt or a non-recourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable."
Because the home (real property) is supporting the HELOC as the collateral, I reasonably believed it was non-recourse. I am happy to accept differing points of view, however!
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
Sorry, but All RE loans are secured by the asset/collateral, and I have never seen a non recourse SFR loan, hence the reason you need him as an additional guarantor. Generally non recourse loans are above $5-10M on large commercial projects. Step 1 is sit down with whoever you think you're going to get financing from, ask your questions, and get prequalified for some financing so you Know what you can get financing. You need to know how many bullets you have in your gun, before you can pick your battles.
Investor · Washington, Washington D.C. · Member since 2014 · 96 posts · 39 votes
12y
@Wayne Brooks Thanks. A Google search seems to indicate that a HELOC can be recourse or non-recourse, and it depends on state law.
So, to anyone who can help, given that, would the answer to the original question change? What percent is appropriate for non-recourse? What percent is appropriate for a recourse borrower like the family member I describe?
Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
12y
I think the reason you're not getting more response is because your question is really hard to make sense of. I have never heard of a non-recourse heloc, despite what the oracle google says ;) and the very concept seems bizarre to me. The idea of having a co-signer on a heloc also seems really strange.
Perhaps you can step back and re-phrase your explanation what you are trying to do -- for instance, who's house is the heloc on?
Family member and I already jointly own another property. We want to obtain a HELOC using that property to use for REI. Other than co-signing on HELOC, family member does nothing else in the real estate business.
What percentage is fair for the co-signer of the HELOC under that scenario?
(apparently copied from the Federal Housing Finance Agency). I think another thing to be understood here is that deficiency judgments are probably only going to be in play if the property is "foreclosed" upon and there is not enough equity to pay it off.
Correct me if wrong, but that would only happen if (1) certain funds had been used from the HELOC (2) the house had lost value, and (3) foreclosure or a lien was necessary to collect the debt.
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
Maybe 2/3 and 1/3. Before you get too far, what's your current loan balance and appraised value on the other property? HELOC's are usually for owner occupied homes, not investment properties. Talk to your lender.
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
You probably need to forget the non recourse issue, as in most states where there is no recourse, it only applies to the first mortgage used to purchase, and not to refi 1st's. did I mention talk to your lender before you try to make a deal with your relative?
Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
12y
That does explain it better! You guys want to use your equity in one investment property to leverage another. It's not always possible to do a line of credit on an investment property (and it would, technically, not be called a heloc in this instance because it's not a "home" equity line of credit. This may have been the cause of some of the confusion). You might be better off going for a cash-out refinance- I'd say lenders are more comfortable with that on investment properties because then they have just the one first position loan.
Wish I could help about the percentages but that is outside my scope of knowledge. In the end, especially with family, I'd guess it comes down to what feels right. Although if I were doing all the work AND putting up 50% of the money I don't think the 2/3 that Wayne mentioned would be enough to keep me from feeling a bit resentful in the end... I guess the size and scope of the deal would play into it as well- how much work would I actually be doing for how much money? Plus, how badly do I need the other guy on board to do the deal? If I really really need him then it's worth giving up more than if I'm just having him onboard because we're already working together on the other property... lots of possible ways to approach thinking about something like this
Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
12y
Still kind of confused.
When you say they are putting up 50% of the financing are you just talking about co-signing this "HELOC" or is there another loan and/or are you saying he will put up 50% of some amount of cash?
If the guy is literally just signing then 1/3 seems like a lot.
Also if you plan on getting financing on this place no you aren't getting any kind of conventional financing if you buy it with an LLC. Commercial and Portfolio only, which cost more and have far worse terms.
Investor · Washington, Washington D.C. · Member since 2014 · 96 posts · 39 votes
12y
@Shaun Reilly Thanks for your thoughts. Sorry to be confusing. Was trying to give sufficient details, but might have done it better. For purposes of this question, assume that this is all viable:
Family member and I already jointly own another property. We only want to obtain a HELOC using that property to use for REI. Other than co-signing on HELOC, which we know we are able to obtain, family member does nothing else in the real estate business.
What percentage is fair for the co-signer of the HELOC under that scenario?
You said 1/3 seems like a lot. What would you consider fair for the HELOC co-signer?
@Shaun Reilly Thanks for your thoughts. Sorry to be confusing. Was trying to give sufficient details, but might have done it better. For purposes of this question, assume that this is all viable:
Family member and I already jointly own another property. We only want to obtain a HELOC using that property to use for REI. Other than co-signing on HELOC, which we know we are able to obtain, family member does nothing else in the real estate business.
What percentage is fair for the co-signer of the HELOC under that scenario?
You said 1/3 seems like a lot. What would you consider fair for the HELOC co-signer?
To be honest given what you just described seems like the percentage should be a lot closer to 0 than 33.
The way you explanied it it sounds like the only thing this person is doing is allowing you to access funds that are just as much yours as it is his/hers.
I'd probably offer to make the HELOC payments and pay them some interest rate on the money past that, like 4-5%.
If you think about it that is a pretty nice return since if you were paying for "your" half as well you would be offering 8-10% plus the interest rate on the HELOC.
If I was doing equity I'd be less than 10% on this.
I respect "The Money Guy" and that they are a vital part for many investors. But that isn't what this is. The money in question isn't their money any more than it is already yours. They also can't tap into it without your consent either.
As someone said above family is much more important than property so that is a big factor in this. If you feel you need to give more to keep a good relationship that is the price you will pay. As for their actual contirbution it is minimal IMO.
minneapolis, MN · Member since 2017 · 79 posts · 92 votes
8y
Not sure what the protocol is on bumping old threads... I'm in a similar situation.
DTI doesn't quite cut it, so I will need a cosigner. If I were to have my mother or father cosign on a mortgage with me, contributing no funds, only their credit reputation, what sort of deal should I work out? My mother is so nice... She offered to cosign for nothing in return, but I don't want to take something for nothing. I would like to give her a percentage of the cash flow and a small percent of the equity when I sell.
What do you think would be a fair deal for my sweet mother?
Lender · Dayton, OH · Member since 2008 · 1k+ posts · 705 votes
8y
For Mom, I'd give her at least 10%, just for taking the financial risk.
On the other hand, if the DTI doesn't cut it, are there other factors that make this a good deal, or should you be looking for a better one? If the DTI is low, who is going to cover any of the potential shortfalls?
Investor · Washington, Washington D.C. · Member since 2014 · 96 posts · 39 votes
8y
@Account Closed I was the OP several years ago. We ended up going with just a "flat fee" of less than $1,000 per year for each year I was using the funds. Family member is happy, because it's "free money" for not doing much, and I am happy because I can use the funds. If and when family member also wants funds from the HELOC, the fee will go away, and we agree to work in good faith to share the limits. It has worked out well.
For Mom, I'd give her at least 10%, just for taking the financial risk.
On the other hand, if the DTI doesn't cut it, are there other factors that make this a good deal, or should you be looking for a better one? If the DTI is low, who is going to cover any of the potential shortfalls?
10% of the cash flow? That would be fair I think.
On DTI, not sure what you mean. The deal isn't the problem, it's my ability to get another mortgage after just buying my primary residence. Maybe you are confusing my own personal DTI ratio with the net operating income of the property? Must be. I'm speaking about my ability to qualify. The cashflow would be great.