Investor/Consultant · Minneapolis, MN · Member since 2015 · 29 posts · 6 votes
Hi all-
I was hoping to get the Community's take on the following scenario...
I am looking to acquire my 5-6th units via a duplex. This would be a solid property in a good area consistent with my portfolio to date. The property is rock solid, but not a lot of room to gain intrinsic value thru rehab, but an opportunity to increase under market rents. Plan would be to buy and hold for 5+ years. At the end of year one, projected Cash on Cash would be about 9% based on 25% down on a 30 year note. So here lies the question... my goal is to scale my business while preserving as much of my own capital as possible... how have people gone about this? Any creative ideas?
Also, I have a few friends who are interested in investing in real estate with me... how would/could you structure a deal with them given the situation described above based and based on them investing 25% to 40% of the asking price? Again the goal would be to provide them with an attractive package, while still allowing me to profit off the property and preserve as much of my capital as possible?
First time with facing this situation of private financing, so any/all information is appreciated.
Rental Property Investor · OK · Member since 2015 · 316 posts · 216 votes
10y
Hey Chris
I think the question you need to ask yourself in this situation (where your equity partner is bringing 25-40% to the table...the down payment basically), is "what value do I bring to the table?" It is very difficult to structure a PE deal when the other partner(s) is not also bringing cash in or is in some way developing/renovating the property.
Investor/Consultant · Minneapolis, MN · Member since 2015 · 29 posts · 6 votes
10y
@Scott England Thanks! In this case I would still bring some cash, as well as the management of the property to the table, but point taken. Basically, they are looking for an alternative asset class (real estate) to beat the market performance.
So, if change the original scenario and saw I put down the 25% and had someone that was interested in investing an additional 25% but that person did not want ownership of the property, just returns. What have you seen in terms in offerings/terms? Would it be a straight % return for a fixed period of time, equity offering, combination of both or something completely different?
Rental Property Investor · OK · Member since 2015 · 316 posts · 216 votes
10y
I think it will boil down to what the partners' goals are, including yours. For example, we are currently working out a few PE deals where getting paid back quickly at a set return is our primary objective. So, that being the case, we are structuring the deals where we put 50% cash into the down payment (70-80% LTV) but take a 2nd lien position with a 5-7 year repay period and an inferior ownership stake of 10-20%.
This (or something similar) may work for you if you are willing to give up cash flow for a few years to buy out (via the 2nd) your investors quickly, then retain majority ownership. The 10-20% ownership you give up allows you better terms on the loan, but more importantly, gives the other partners an interest in the success of the project.
Hope that helps some. Let me know if you want to chat offline and run through multiple structure options.