50% partner wants 100% cash flow.

49 Replies

Hey guys! One of my investors has offered to be a 50% partner and finance the down money for properties and in return they want 100% of the rental cash flow until my half of the down money is paid back. Its basically an interest free loan that the tenant would pay off for me. My gut is saying to move forward but I may not see any money for a few years depending on the size of the down payment. Other than a cash out refi, which they are open too, to pay the debt early is there any other options I could pursue? Has anyone ever been in a partnership like this? Thanks in advance!

I would use this as a hard money lender like you said

borrow the money, season the unit, refi and pay him off.

Though I fear it's unlikely he would go for this, i know I sure as hell wouldn't.

Unless you have no other options I personally wouldn't pursue this option if it had to be long term. That's a lot of liability to take on for a long time with zero income.

Sounds like you're getting a raw deal unless your partner is bringing something else to the table. Who is finding the deal? Managing the rehab, tenants, insurance, etc? If the answer is you, then your partner is just a lender. You can find way better terms than giving up 50% of your equity and 100% of your cash flow. These are the kind of terms that would make a mafia loan shark proud.

Thanks for the advice. I would be handling everything since they are out of state investors. Any thoughts/suggestions on how to turn this around in my favor? I would hate to just walk away from someone willing to invest but at the same time don't want to be doing all the work for nothing.

@Samantha Schwartz ask the “lender” if you can collect the 13% property management fee just as you would if you outsourced the management of the tenants. It never hurts to ask and someone needs to take care of the tenants, for a fee. It’s 13% now where I am in NE Florida.

How good of a deal is it?  if it's any good, you should be able to find another investor.  I've been there, thinking that this one lender is my only chance of closing this deal.  If the deal is good, the money won't be that hard to find...  Money chases good deals

Being on the other side, when I provide 100% equity and my partner provides 100% of the work..we split 50/50 from day 1.

He would have no deal without you, you would have no deal without him. His leverage over you isn’t any greater than your leverage on him. Keep it even. 50/50

I think that is a good deal base on these assumptions.

- Other investor pay 100% down payment.

- you get 50% equity on the property.

If someone is willing to pay all the down payment for a deal and I get to own 50% equity I don't see where the problem is.  What percentage is the down payment?  You seem to have very little risk in this.  You are basically managing the property in return for your share of the down payment.  I think maybe to sweeten up the deal you can ask the other investor to give you a % for managing the property after he gets 50% of the down payment back(your share) .

Hmm.  Who is paying for repairs and handling expenses?

Hey I living you should negotiate a preferred return with your limited partner. Tell him or her that they will receive all of the cash flow up until a certain return and then from there you will split those cash flows 50/50. For example, 8% preferred return, he or she gets all of the cash flow up until 8% and thereafter you and the investor split.

Samantha,

what will be your share after your 50% of the down payment is paid back to them? if you are handling the bills, then you should negotiate that they receive 100% of the NOI each month until your half is paid, this way all the expenses are covered and do not come out of your pocket. that's under the assumption that you will be 50/50 partners after your 1/2 of the deposit is paid.

@Samantha Schwartz

I think that this is an opportunity to leverage your sweat equity into 50% equity of a property with no money out of your own pocket. He is asking to be paid back not take the profits indefinitely. If it were indefinitely, then I would worry about it.  I would take this deal any day. And you have the option of paying him back the down payment to get your cash flow. Also, there is a lot to be said about respecting the money put in the deal.

I would just make sure you have an iron clad partnership contract to spell out this arrangement and include any contingencies like refinancing the property or what to do if one partner wants to be cashed out, etc.

If I found a partner like this, I would go out on a buying spree!

Originally posted by @Samantha Schwartz :
Hey guys! One of my investors has offered to be a 50% partner and finance the down money for properties and in return they want 100% of the rental cash flow until my half of the down money is paid back. Its basically an interest free loan that the tenant would pay off for me. My gut is saying to move forward but I may not see any money for a few years depending on the size of the down payment. Other than a cash out refi, which they are open too, to pay the debt early is there any other options I could pursue? Has anyone ever been in a partnership like this? Thanks in advance!

Regarding "Has anyone ever been in a partnership like this?" My answer is 'sort of'. Not your scenario (as I think I see it) but similar. Each investor will have different motivations and needs. Your operating agreement will spell out how cash distributions work (sounds like the cash partner gets distributions prior to you) and the K-1 P/L/C allocations will identify how Profit, Loss, and Capital are allocated. Your partner's capital contribution is cash and financing. Your capital contribution appears to be as organizer, operator (daily manager), and possibly other contributions (e.g. rehab work?) you haven't disclosed. On the books, your partner's paid-in capital will be about 85%-90% with yours the remaining (comprised on non-cash (in other words, service) contributions). I assume that your partner will take 100% of the depreciation loss as well as the cash distributions. In the event there are capital calls, like when the furnace fails, your operating agreement needs to spell out who provides additional paid-in capital funds or services.

Given that your paid-in capital is a non-cash contribution, your partner's offer seems reasonable. But the details are in how you write the operating agreement and how that translates into your K-1 P/L/C allocations. My 2 cents. 

If you are handling all the management, pay yourself. That's how you make it work.

I think 100% cash flow until half is paid off is a little steep.  I'd offer to pay him first though.  Figure out what the monthly cash flow should be.  If it's $1,000/month, offer to pay him $500/month first, then 50/50 on the cash flow after that until half is paid back.  If you can't otherwise afford to do this, that wouldn't be too bad.  You'd get 50% ownership in the property, some cash flow, and then 50% cash flow once half is paid back.

Also, do the math.  If it's going to take 10 years to pay half of it back using any method, it may not be worth it.  But if it's 2-3 years, that's not too bad to get in with $0 and still own half (and get "some" cash flow).

I think some of you are missing the point.  

You get 50% equity for managing the house

The only time this is a bad deal is if the 50% equity is not worth your time managing the property for however long before he gets his down payment back.  

I agree with @Qi Ming Chen - as long as you are not on the hook for paying capex/repairs out of pocket, why wouldn't you want 50% equity in property when all you have to do is manage it?

Without the Operating Agreement between her and the partner, we are just assuming.

I really appreciate all the great feedback!  I went back to the table with them to discuss some of the ideas that were presented here.  @Rob Beardsley, thanks for the great idea.  I offered this one up first so we'll see how it goes!

Originally posted by @Rob Beardsley :

Hey I living you should negotiate a preferred return with your limited partner. Tell him or her that they will receive all of the cash flow up until a certain return and then from there you will split those cash flows 50/50. For example, 8% preferred return, he or she gets all of the cash flow up until 8% and thereafter you and the investor split.

@Samantha Schwartz - I guess you know the answer. There are many ways to ensure your returns. Read BP and try to understand the finer aspects of REI. There is no free lunch.

Good Luck

Vivek

Originally posted by @Qi Ming Chen :

I think some of you are missing the point.  

You get 50% equity for managing the house

The only time this is a bad deal is if the 50% equity is not worth your time managing the property for however long before he gets his down payment back.  

 No, they're not missing the point.  Equity, even if she got 100% is a future return with its success based on future events she has no control over.  This isn't investing...this is speculating.  Let me list the 3 top problems of why this is a really bad rationalization for a bad deal:

1 - There is no guarantee there will be any equity when the cash flow pays back the partner's down payment money.  

2 - There is no time frame of when, or if, the cash flow will achieve this pay back.  How many years could this take?

3 - ...and the best, or worst, is all she gets while she's waiting is the privilege of doing all the work for her partner's profit, and nothing...absolutely nothing in return.   Now before you say "equity", I will say that prized equity you speak of is an imaginary number that can only be gained access to when an exit strategy is in place...i.e. selling the property or refinancing.

If either of these options is approved of, in theory, by the cash partner, then you must set up an agreement stating all of the terms and conditions when either of these events might occur.  Who gets what, when...and how?  Project the numbers, with % of splits of all the money at the time of refi/sale, and see if it is worth it for your funding partner...then see if it is worth it to you to wait until that happens.

I doubt it. This is an example of a shiny object of distraction, that is usually made impressive by some type of rationalization, like the naked equity in this case. Rationalization is the most expensive word in a REI vocabulary. Avoid it...at ALL CO$T$.

@Joe Villeneuve  If what I am reading is correct she is managing the property as a payment for the down deposit she would have to pay out of her pocket.  Any cash flow going into paying for the loan on the property become her equity immediately.  

I understand that if the house appreciates then that's great but even if it doesn't she still gets the portion of down payment she helped contribute to.  Unless the down deposit is a really low % of the value of the property and/or the property value is insignificant how can it be a bad deal?  I assume that if the down deposit is insignificant to her or the entire property is insignificant to her then she won't want to participate in the partnership in the first place since it won't be worth her time.

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