Returning Principle to funding partner/private money lender

3 Replies

Hello,

I am trying to research how to structure an agreement with a funding partner. I have found some great resources (https://www.biggerpockets.com/blog/2015/12/03/structuring-partnership-rental-properties/) but none of them discuss returning principle to the lender.

Example:

Managing partner A (me) and funding partner B (them) decide to go in on a multifamily.

$200,000 property 20% down + $10,000 rehab

Funding partner funds all $50,000.

Profits are split 50/50 (monthly cash flow / profits on a sale/refinance)

Sounds simple enough however how do you determine when to sell/refinance? When can you pay out the investor? Can the funding partner tell me he wants his capital, how would I get it out of the property if there isn't enough equity?

What are the common ways to repay private investors their principle? I appreciate any advise! Thank you.

@Jacob Thorp , you can put in a "hold" period (e.g. 7 years) at which point you agree to dispose of the property or must mutually agree to continue holding it. Should an opportunity to sell/refi prior to that, you must mutually agree to action that opportunity.

So, the equity partner could not retrieve their capital until the holding period expired and the property was disposed of. If there is not enough equity to repay the full $50k at that point, he takes a loss. If there is a profit, typically all of his investment is repaid and then anything over and above is split.

@Jaysen Medhurst ,

Thank you for the input! I like the idea of a hold, and after the period (e.g. 7 years) we could somehow hold the right to refi instead of sell, I'd much rather refi to maintain the property and stop splitting the cash flow. Maybe that's just built into the agreement, after X number of years you'll get principle + 12% and you'll be out of the property. 

Thanks again! 

I am part of 4 different LLCs that hold rentals (cash, retirement funds, mixed partners,etc...) All of our operating agreements have some for of what @Jaysen Medhurst eluded too. Our intended hold period is at least 10 years. If we need to sell before then the funding partner would get all of their down payment back FIRST out of any equity and THEN we would split things 50-50. If their is a loss at that point they loss some funds and we get nothing equity wise. 

We are hoping by the 10 year point, there would be enough appreciation and loan, and that rates are still reasonable, so we could 'cash out' the private money partner if they so choose and we would take over.

Dan Dietz