I have private money, how do i structure the deal?

Question

Hey Everyone,

So far i have purchased a few rental properties with my own money, and renovated them myself and so on.

I want to start scaling a bit quicker, and with your own money its a bit harder since you have to find the properties, renovate, refinance and hopefully get some money out of it and then look for another property.

Currently i have a few places where i can get private money which i want to utilize.

My question is how do you structure a deal with a partner? These partners don't want to be in for the long run, they just want to put the money up front get a good return within 2-3 months and get their money back.

How does this work? Basically im trying to figure out what to offer to the partner... I am not really sure if im asking this question correctly :(

Thanks

Sasha Mohammed · Answer

@Daniel Daskaloski it would probably be more appealing to your investor if YOU put the down. That way you have some skin in the game.

I'm still a little confused as to what your question is here, but if you're looking to rehab properties without utilizing your own funds, I would GUESS (unless you're experienced or have an experienced rehab team) that 2-3 months is probably not a long enough window to complete the project, let alone get a cash-out refi and pay off your "investor".

** If the project completed with a cash-out refi would not profit enough to pay back your investor, then it probably isn't worth moving forward with that project, and i would look into another property with higher returns. Don't get stuck on one property, run the numbers and make sure the juice is worth the squeeze. **

There are plenty of lenders out there that specialize in such rehab projects, and will lend you not only funds for acquisition, but also rehab funds. and they'll give you the time needed to finish the project (12 months, or longer). Plus, that's what they specialize in, so you have a bit of a safety net in that you're not jimmy-rigging a deal together with an individual investor.

Hope this helps!

Sasha Mohammed · Answer

@Daniel Daskaloski Step 1 - find a project that would garner a return. If you rehab it and plan to keep it, the end result is the same -- you still have to pay off the investor. If the rehab doesn't add enough value to pay your guy off and still be in the green, it doesn't seem like much of a deal to me.

Most lenders won't go off of actual appraised value after only 2-3 months, they'll go off of the purchase price. so that's another factor you need to take into consideration if you're planning to go down this road. most will give actual value after 12 months, if you're lucky after 6 months. And still, you might only be able to get something like 75% of the value on a loan. does that pay off what you owe to the investor?

since you plan to keep it, the numbers you need to run are 2-fold. The acquisition cost, rehab cost, loan cost (private money guy, he'll probably want a monthly IO payment at minimum for those 2-3 months)... along with the ARV and what you could realistically get in cash-out proceeds with a refi once the project is done. THEN you need to look at how much is the property going to bring-in in rents from a prospective tenant, and will it still be cash-flowing with the loan i just took out to pay off my investor?

Already it seems those numbers are very tight, just based on your posts above. I don't want to be the nay-sayer, but it doesn't seem like this specific project is a good deal. That's not to say the way you're going about it is wrong or bad.

If you have someone that would be willing to put up 100% of the acquisition and rehab, that's awesome! just make sure you don't over-extend, and that you have a CLEAR exit-strategy, otherwise that dude is going to foreclose and take the property from you entirely. he might not even thank you for cleaning it up for him.

Nick C. · Answer

Yes if you can't pull all of your investor's money out via a refi, then it wouldn't be much of a deal. If you're buying close to retail that will not work, it only works if you're buying at a discount. Banks are going to loan at best 80% of the ARV, and you need to account for closing costs, lender fees, appraisal costs, etc.

Nick C. · Answer

It doesn't sound like this is a situation where they would be partners. If they want a return and get their money back quickly, why not set it up as a loan? Give them a mortgage on the property and a promissory note. Pay them interest while their money is out, then pay them back the loan balance when you refinance the property.

Daniel D. · Answer

Sasha,

Thanks for the very informative post.

I do not want to rehab and flip. I am want to rehab it and keep it for rental purposes. I am not looking to flip.

So i have the private money available, but i guess there is no way to do this without putting in any of your own money which is what i was trying to avoid.

2-3 months is more than enough time to renovate (for me at least), i do have the team to do this.

So for me to use somebody else's money at 100% i would have to find a really cheap deal and then cash out refi?

Thanks

Daniel D. · Answer

Nick thank you for replying.

Let me rephrase my question, what is the best way to utilize someone's money to purchase properties?

Have them put the money down for the down payment + reno and then refinance to pay them back? Multi family's give very little money when you do a cash out refi it wont be enough to pay the person back.

All im trying to do is not use my own money for the deal and I do have access to the private money.

Thanks

I have private money, how do i structure the deal?

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