I have a private lender who wants to lend/partner on long term buy and hold rentals.
If the private lender provides all the cash, and I do everything else (locate deal, evaluate, negotiate, oversee renovations, rent & manage), what is a fair equity split arrangement?
Location of property and Fair Market Value to the loan plays a role in this too.
It is good idea that you lender does not invest all his savings on one investment; as a good will.
Normally people would like to see around 10% Return on investment. Finally, it depends on your investors risk tolerance.
If I have a private lender who funds everything and I take care of acquisition, rehab, PM, etc I use 50/50. There is no set policy. It is whatever you two agree to. Everything is negotiable.
Thanks! Private Lender would be lending 70% of the value of the property. The initial purchase would be approximately 10-20% of their savings.
You can write up for 50-50 or 70-30 or whatever number makes is reasonable return. There are few items here.
- You are paying cash flow as partnership. How would you handle vacany and maintance?
- When is the time line to payoff? Are you giving upside profit if sold for profit?
- What if the market corrects and value goes down? Are you covering that loss of the principle?
@Kenneth Garrett thanks! Helpful to have a gauge
Right. So a percentage of the monthly rental income would be set aside to cover maintenance and vacancy.
There is no predetermined payoff timeline. It is a long term hold.
If the market corrects, and it will (though rentals in my area are starting at a relatively low base), we hold.
So, given that we could theoretically hold endlessly, and thus never cash out, another angle is to ask how to split both cash flow and equity...
@Paul Nichols since I am also looking for a private lender that would fund a buy and hold, I have thought about this. The answer I came up with is what the private lender willing to receive and what I feel my time, skill and work is worth in the deal. The most I would prefer to give is a 50/50 split, because even though the deal would need there money, but that would would only be initially, where I would handle all the day to day management of the property which would include the accounting. With that being said it would not be worth it to me to settle for less than that.
@John Britt good stuff, John.
Being that it’s a long-term hold and we potentially may never cash-out, what would seem to be a fair split of equity AND cash flow?
@Paul Nichols I would say what is fair is what you both could live with.