50% partner wants 100% cash flow.

49 Replies

@Samantha Schwartz

Hi Samantha,

Here is an option. See if you can close the property with either a 2nd Loan or a Line of Credit (like a HELOC) which can cover 1/2 the down payment, which would be your portion.

If that's possible, and it may be because he is putting down 100% of the down payment, so the 2nd Lien needs to have only 1/2 of the equity.

Make an agreement that you are the borrower of the 2nd Lien, which you can then give it to him for your half of the down payment.

That makes you both equal partners as his 50% of the Down Payment is covered by his cash, yours is covered by the lien that you are fully responsible to repay out of your own money.

Once you do that, then you can then both split the cash flow 50%/50%.

Your PMing should not be for free. It should be worked into the Expenses and the Cash Flow should be worked.

SO, as an example, lets say the rent is $1,500 per month.

Let's say your PMing is $100 per month.

Monthly Expenses is something like this:

$100 - Property Tax

$ 50 - Insurance

$ 50 - Other Expenses

$100 - Cap Ex/Maintenance Reserves

$100 - Your PM Costs

---------

$400 - Total Expenses

NOI = $1,500 minus $400 = $1,100 left over.

Subtract the 1st Mortgage Debt Service, but only the P&I portion!! Make sure you don't subtract for Property Tax and Insurance if it's being Escrowed otherwise you are double dipping on the expenses for those.

Let's assume the P&I is $300 per month.

The total Cash Flow is NOI minus Debt Service (P&I only) = $1,100 minus $300 = $800 per month Cash Flow.

So you give him $400 for his Cash Flow. You collect $400 for your Cash Flow.

Don't forget you also collected $100 for your PMing from the Expenses so you actually collected $500 total.

Now, since you are responsible for the 2nd Lien, it should be a requirement that your use the fulll $500 total you collected to pay off the 2nd Lien until it's fully paid off. In other words, any Cash Flow and PM Fees you collected should be fully used to pay off the 2nd Lien.

After you pay off the 2nd Lien, you can then re-open it and distribute that 50%/50% each!

In other words, let's say the 2nd Lien was a $30k Line of Credit. Once you paid off the full amount of that balance, the Line stays open. You can then distribute $15k to your partner, $15k to you.

When you do that, you can then use the Cash Flow to pay for the 2nd Lien.

Now you have cash to buy your next property! Your partner now has an extra $15k too!

It's a win-win situation and sets you up for the next deal!

Hopefully this gives you some ideas!

Originally posted by @Qi Ming Chen :

@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.

 That's what I read.  It ends up the same...in equity...which is a "virtual" return until they sell or refi.  If they don't sell or refi, she has a trophy that her partner paid for in dollars, and she paid for in work, and more importantly, in her time.

Originally posted by @Samantha Schwartz : 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.

 It is in your favor: this arrangement earn you equity!

Besides, first from Rent you have to pay taxes, HOA if any, cap reserve, repairs, mortgage, management to you (maybe 50% since you have half of the property) by market rate.

You partner contribute the down payment with some low interest and then you pay off his down payment as a second mortgage, amortizing it depending on the amount.

For few years you'll have only management fees, pretty low, but Tenants will pay down your mortgages. After all, you might have money later and pay off your part of his mortgage.

However, without these money, you can't buy the property, can you?

Money is very important in the investing, as well as the expertise. You both need each other.

The best part, you can create many of such partnerships and with time, you'll have quite few paid off houses.

If you decide to split, you'll sell the houses, you bought together (hopefully in a hot market...lol), pay off mortgages and split the balance left. How it's bad?

Off course, it's possible, that you decide to dissolve your partnership in a bad market....well, then it's too bad. Then you might have your properties "under water" like many people did during Great Recession. But this is part of taking risks.

Actually, you can mitigate these risks since you're the participating partner and I assume you're finding the deals, managing everything, so it's up to you to make the investment profitable.

I do have such arrangements and working on getting more. I'd rather partner with people who have their own money rather than using hard money lenders. I do have my own properties, too, but that's very restricted by funding available to me.

Just write up some agreement, try to work it out and then see for yourself if it's good for you. There is no such thing as working for free: you learn something new anyway, and experience worth a lot.

Good luck!

A mentor once advised me to look for someone who has funds to fund deals and because I have the experience which they don't, then I do all the running around and we split 50/50. If I were you, that's what I would do, you supply the skills and they supply the money.

One thing to consider is if you are signing on the loan or if they are paying the down payment and securing the loan.  If this doesn't tie up your financing ability you are essentially betting your time for a chance to earn equity.  If you think this is a good deal from the onset and if the numbers are good this isn't a horrible deal for you.

It also hasn't been clarified exactly how the cash flow works and if you are projecting cash flow.  If you are not projecting much cash flow this makes no sense at all.  it also makes no sense if you have to put in 10 years of work before you get a return.

In a normal situation with 50/50 owners cash flow is split 50/50.  Are you able to credit 100% of the cash flow against his down payment?  If so this is essentially giving you a great return, you have nothing invested and are getting 100% of the cash flow until you are paid up!

I agree with others in that it may make sense to look at getting a separate loan for your half if you like the deal, may make it easier.  If you step in 50/50 you are in a position where you can ask for a management fee.  13% was mentioned, that isn't what people are paying in my area, that is quite high.  If you ask for this you should be realistic as you are managing the property for yourself also.

I have seen deals setup like this, it isn't uncommon.  As previously mentioned it may make sense to offer a preferred return to the investor such as they receive 8% on their initial investment before cash flow is split until their loan is repaid.  This can be done many different ways but often it is completed with A and B units.

Another way I have seen this setup is that they are essentially loaning you money.  Let's say the down payment is $50k, in a 50/50 world you would each put down $25k.  The other investor essentially loans you $25k at X%, you split cash flow and you use your portion to make payments on the loan.

You also haven't mentioned taxes at all.  If you end up with a taxable rental you don't want to get into a position where you are being allocated income, paying the income to your partner, and not having any cash to pay your tax.

Many things to consider.

In any instance once you come to terms you should invest in a solid operating agreement.  This will protect the both of you and will be worth the money.  The deal he is offering may be good, it may be bad, it depends on the missing information.  I would take on as many investments as I could if I could walk into them without anything down and zero risk of loss!

So if they default you never saw a penny.  What a rotten deal. 

Originally posted by @Irina Belkofer :
Originally posted by @Samantha Schwartz: 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.

 It is in your favor: this arrangement earn you equity!

Comment:  So What.  Equity is worthless until you access it.  If it disappears before you can access it, what have you gotten?

Besides, first from Rent you have to pay taxes, HOA if any, cap reserve, repairs, mortgage, management to you (maybe 50% since you have half of the property) by market rate.

Comment: No, as long as you have positive cash flow, your "tenant" is paying all those things.  Would you also complain about winning the lottery, just because you have to pay taxes on your winnings?

.

However, without these money, you can't buy the property, can you?

Comment: So What.  Buying the "Property" isn't important.  Buying the "Deal" is.  This is in no way a deal.

The best part, you can create many of such partnerships and with time, you'll have quite few paid off houses.

Comment: Again, So What.  What's the most important part of this statement?  The words "with time". My question is, "then how much time"?  If this is a 30 year mortgage, then in 30 years she will have a number of paid off houses.  Great.  In years 1 - 29, what happens?  Also, let's add 30 years to an assumed current age of 25.  That means from years 25 - 55, she has no income and a lot cost and responsibility.  At year 55, she reaps the benefits.  Can  you guarantee those projected benefits will be there in 30 years?


If you decide to split, you'll sell the houses, you bought together (hopefully in a hot market...lol), pay off mortgages and split the balance left. How it's bad?

Comment: This depends completely on "deal" they make now.  You make your money when you buy/enter...and realize it when you "exit".


Off course, it's possible, that you decide to dissolve your partnership in a bad market....well, then it's too bad. Then you might have your properties "under water" like many people did during Great Recession. But this is part of taking risks.

Comment: No, this is called speculation...not investing...and there is no reason to take this type of risk.  There are so many more far less risky deals available.  Besides, all deals should have risk controls in place...which this one does not.


Actually, you can mitigate these risks since you're the participating partner and I assume you're finding the deals, managing everything, so it's up to you to make the investment profitable.

I do have such arrangements and working on getting more. I'd rather partner with people who have their own money rather than using hard money lenders. I do have my own properties, too, but that's very restricted by funding available to me.

Just write up some agreement, try to work it out and then see for yourself if it's good for you. There is no such thing as working for free: you learn something new anyway, and experience worth a lot.

Comment: Your last 3 statements above, are true, only if you don't know how money works.

@Samantha Schwartz  

Many investors will demand all types of things. I would never take that deal frankly. You found the property, you define the deal terms, they accept it or don’t. 

Your getting hosed with their Mr Nice Guy offer, and they know it. You don’t have to lose the investor, just tell them thanks but no thanks, and put them back on your list of people to call. Nextime set your deal terms prior to calling your investors.

I think this guy has watched Shark Tank too much and thinks he’s Kevin O’Leary

He wants to loan the money AND get paid 50% for doing so.
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Typical on a smaller deal is 50/50 from the beginning for the cash person and the time/experience person.
However, a glance at your profile does not list any experience. If that’s the case you’re missing 1/2 of what is usually brought to the table by your side.

This seems like a very fair deal to me. 0 money for 50% equity is a good deal. I do however agree that some mgmt fee should be provided. Also any future repairs not funded by the property need to come out of both investors pockets.

Originally posted by @Collin Schwartz :

This seems like a very fair deal to me. 0 money for 50% equity is a good deal. I do however agree that some mgmt fee should be provided. Also any future repairs not funded by the property need to come out of both investors pockets.

 Great.  I'm always looking for cash partners, if you're interested.

@Levi T. and @Austin Fruechting

I was one of the ones who thought this might be a good deal.  You two are quite successful, so I was wandering if you could shed some light on this so that I can understand.  I made a ton a deals in a short period of time earlier in the year and was actually in @Samantha Schwartz 's situation, except that I had experience and the other investor had absolutely no experience.  I was stretched extremely thin, so I brought in an investor to help close one of them.  I proposed 3 options. 1. A loan for one year at a great interest rate, 2. 50/50 on the money in the deal and 50/50 on cash flow, 3. He would put the money in and he would get 100% of cash flow until he was paid off, then 50% thereafter (just like Samantha's except I actually proposed this and I had the experience and the other party didn't).  Now here is the thing, he actually went with #2 because he did not want to put all of the money in.

My reasoning for #3 was to respect the money.  Also, this deal could not have happened without this help and was part of a package deal in which I had to close on all of them or would have lost the entire deal. Also, interest free is an added benefit.

I do agree that she should get an allowance for property management.  I declined this to sweeten my deal to the investor, but then again I was thinking big picture. I also did not get paid for managing the renovation for 2 units that were completely gutted and partially renovating a 3rd unit.  I acted as a mentor for this part and the property management part.

Updated over 1 year ago

Also, by putting no money of your own in a deal like this, it would be an infinite return. An infinite return isn't easy to find. This is assuming there is a property management allowance. Otherwise, it is then sweat equity.

couple things as I pride myself in being pretty creative in setting up equity share deals.

if your not a licensed realtor then you need to be on title to legally manage these.. so your going to have some risk.. who gets the loan are you signing PG for loan etc.

how much cash into these deals are we talking about and how long to pay them back ?

if you can get in and out quickly then first money in = first money out is fairly common in the industry.

however reality is you may not be able to afford to work for free.. you need to understand that as well.

I suggest you talk to @Brie Schmidt   she has successfully done a few of these with west coast investors.

at the least though I agree with a management fee while your paying off the equity..

Originally posted by @David S. :

@Levi T. and @Austin Fruechting

I was one of the ones who thought this might be a good deal.  You two are quite successful, so I was wandering if you could shed some light on this so that I can understand.  I made a ton a deals in a short period of time earlier in the year and was actually in @Samantha Schwartz 's situation, except that I had experience and the other investor had absolutely no experience.  I was stretched extremely thin, so I brought in an investor to help close one of them.  I proposed 3 options. 1. A loan for one year at a great interest rate, 2. 50/50 on the money in the deal and 50/50 on cash flow, 3. He would put the money in and he would get 100% of cash flow until he was paid off, then 50% thereafter (just like Samantha's except I actually proposed this and I had the experience and the other party didn't).  Now here is the thing, he actually went with #2 because he did not want to put all of the money in.

My reasoning for #3 was to respect the money.  Also, this deal could not have happened without this help and was part of a package deal in which I had to close on all of them and would have lost the entire deal. Also, interest free is an added benefit.

I do agree that she should get an allowance for property management.  I declined this to sweeten my deal to the investor, but then again I was thinking big picture.

First off you have to understand a capital investor is doing nothing for their money, it is secured by the property so their risk is very low. They get a check each month, quarterly, or as agreed. If your managing or not, they still don't handle day-to-day operations at all, and in some cases they wont put in anymore money for any shortfalls in a given year. You have a deal, it's your deal, it's your terms, remember that.

There are more capital investors than there are deals. If you can't find capital partner for a deal, you likely don't want to be buying that property in the first place, or your not really working as hard as you should to find capital partners.

If your bringing in an investor that is covering 100% of the capital needed to get the deal done, and your bringing the deal that you found, negotiated, and worked to get financed. That's worth something!

Your handling the day-to-day bs of owning the property, paying partners, taxes, etc.. plus maybe acting as a the PM. That's a lot of work.... and by the way, your also the GP, your liable for everything.

If you where doing a syndication deal, you could charge a 10% finders fee off the purchase price for just brining the deal to the table. You have not even gotten to the guy who wants 10-20% to raise capital.

If your also acting as a PM, you may as well cut 30% of gross rents off the top; 10% for just managing rental bs, you get all fees/late fees, plus lease renewal fees, and lease signing fees, etc, works out to about 30% of gross rent in value. 

Add that all up, your cracking 50-60% in cost your just giving away for free. your just letting someone steal a deal from you. They are going to give you the money for a deal, then rake in all the rewards while you sit around and lose capital and time for years. They are not just double dipping, they are triple dipping with that setup.

If you want to give a partner a bump in returns, give them their capital equality percentages, but then give them a net earning equity cut. For example, if the total deal came to 100k, and they put down 30k, they would have a 30% equity in the deal, but you could sweeten the pot with a waterfall, or net earnings bump by giving them 40-50% of net cashflow in the term sheet.

If your letting someone come in and give 30% of a deal cash, then giving them 50% of equity (they are already winning by doing that), and 100% of cashflow till their capital as been redeemed, with likely a clawback clause, while you PM for free. They are strip-mining you!

@Samantha Schwartz listen to @Levi T. !!! Also, what type of asset is it? Rental property? How many units? If the deal can't afford a management fee it a'int a deal! Pref of 7 or 8% then split cash flow 50/50 is customary in this type of thing.

I have entered into a few partnerships in the short amount of time I have been investing. The main way I structure my deals is with the passive investor paying the down payment and being the loan guarantor. Cash flow is split 50%, expenses are split 50%, and when we sell he gets his down payment back first after the loan is paid. Then all profit is split 50%.

You could also consider asking them to be a private money lender. You can pay an 8-10% return on their investment and you keep 100% of equity and cash flow. Use the cash flow to pay them. When the loan is paid, you keep the property!

@Samantha Schwartz , let's say you've done a deal, you've got your free start, with both parties named on the Mortgage/Title, but then, the cap ex bills start rolling in. Who's fronting the ongoing extra cash required for a new roof, furnace etc - ahead of the Tenant having paid enough rent yet to cover those expenses?

ie. Does your cash flow agreement work both ways: they get all the cash, and pay all the bills? At least that way, even if it takes longer to pay down your 50% deposit, you could just say - so what? You're out of pocket zero dollars anyway!

If the Investor balks at that idea, I agree with those who suggest: just offer an acceptable-to-them (but, lower than hard-money interest rate) return on their deposit, which you pay out of your carefully anticipated positive cash flow. Then it could be up to you whether you pay them out from the rest of your cash flow, and/or your other income, or, not at all (until you sell).

The super-important thing is: try to be sure that you've found a real "deal" to start with! My 2c.

Originally posted by @Ivan Barratt :

@Samantha Schwartz listen to @Levi T. !!! Also, what type of asset is it? Rental property? How many units? If the deal can't afford a management fee it a'int a deal! Pref of 7 or 8% then split cash flow 50/50 is customary in this type of thing.

I am going to take a WAG and suspect this is a SFR or very small deal.. if this were a larger multi extra our OP would be a little more experienced and not asking these questions..

I have done a bunch of SFR's like this and unless you can buy them by the 100's just partner a few is a waste of time and money.. and your only going to be working for the equity.. I know I am the equity I have lived it.. I make the money ground partner did not get anything or much.. they get un happy and walk away.. big risk for out of area investor in these little deals.. not enough money involved or generated in gross revenue to keep everyone on point..

In my development deals I do ( but again these are 2 years or less) its pref.. plus first money in first money out.. then split at to whatever I can negotiate.. if I am on the loan its higher.. if its all cash and I have no money in it I give investor more.. and by doing that I never want for capital and can raise it in large chunks.. as opposed to raising money 50 to 100k at a time with a bunch of smaller investors.. not that those investors don't have larger dollars but its a lot of work herding all them.. I prefer to work in the hedge fund mode IE 1mil plus per investor..  

Sounds like a shark tank deal..

Well, to all ya guys who don't respect the money: real life example.

I have 8 rentals, 4 of them on such a deal - 50/50 LLC, cash partner finance 100% and I manage and do accounting.

3 houses we bought two years ago for $60K with 5% APR. I manage each property for $100/mo plus take 1/2 month Rent when find a Tenant.

All expenses get paid before mortgage: taxes, HOA, insurance, PM.

mortgage set up as installment for 5 years, after that will be cash distribution of Rent.

Today, these 3 properties worth $100K, they might worth $150Kin 5 years (it used to be the price before the Great Recession). Without cash partner I wouldn't be able to finance these deals, so I'd pass on them.

I did buy my own properties but that's all I could finance.

So, I'm getting the PM fees, rental fees and my properties getting free and clear during these 5 years.

In 5 years, it's going to be 1.5 houses worth $75K, cash flowing $900/mo (right now it's $600/house per month)

Soooo, what would I have without money?!? Nothing, big fat zero.

What would my cash partner had if I wouldn't agree on that? He wouldn't have anything as well because he's out of country and can't even find a decent PM, leave alone someone able to find a deal like that.

Does it still look like "so what"? Looks like win-win to me....but off course, what do I know? I don't know anything about money ;)

The OP didn't suggest or say syndication, that she was a GP, or this was not a GSE funded, leveraged purchase. I think it is a 'traditional' mortgage at NOO rates and terms. So some of these posts about syndication, etc., frankly, should be ignored. I know of no investor who would accept management fees of 30% gross rents when 7%-10% is the norm in non-VR, SFR rentals.

I would tend to ditch any equity play and just go the easy old fashioned route and do a strict PLM loan with high leverage. The lender/partner is already conditioned for high leverage, but then you can either shine or crap out. BTW, I've seen this play out a few times with some self-directed money funding deals. Sometimes it works... and sometimes the trustee steps in.

As far as I can tell, we haven't seen the operational numbers. Joe says " This is in no way a deal." so he must know more than the rest of us. Please share.

If this is indeed a 'really great deal' (cough... from someone who has... no history?) and the lender will lend 100%... then golden for you. Take the money, 

BTW, I personally wouldn't generally lend in this scenario since you have no track record. I can tell you this. I wouldn't propose this kind of 'partnership' (I assume an LLC, not an LP as other posters have implied) because of my personal needs in P/L/C allocations. As an capital investor, I don't really care about current income Quantity=1 on a SFR property on small deals unless it has no tax liability. I have enough already. Generally I'd prefer equity most of the time, but there has to be a 'deal' there (meaning some kind of built in equity, via change of use (rezoning to highest and best) or just old rehab sweat equity) or Joe it is exactly like you say, fantom equity. For me, if a project has, say, $4K/year in taxable income (with corresponding quarterly cash distributions) with $4K in depreciation expense, then as a partner maybe I would bite... as long as it is packaged in an operating LLC with my K-1 showing no taxable income and no current tax liability.

I'm not a fan of this option. That's like someone asking me to open a ARBNB give them half the commission and I do all the leg work.

I think I would find another lender.

It's a smart option for them. It guarantees "their payment". But no incentive to me.

Great Info @IrinaBelkofer, am in the Cleveland area and would love to connect and my partner and I to take you out to lunch and further discuss this strategy!  Originally posted by @Irina Belkofer :

Well, to all ya guys who don't respect the money: real life example.

I have 8 rentals, 4 of them on such a deal - 50/50 LLC, cash partner finance 100% and I manage and do accounting.

3 houses we bought two years ago for $60K with 5% APR. I manage each property for $100/mo plus take 1/2 month Rent when find a Tenant.

All expenses get paid before mortgage: taxes, HOA, insurance, PM.

mortgage set up as installment for 5 years, after that will be cash distribution of Rent.

Today, these 3 properties worth $100K, they might worth $150Kin 5 years (it used to be the price before the Great Recession). Without cash partner I wouldn't be able to finance these deals, so I'd pass on them.

I did buy my own properties but that's all I could finance.

So, I'm getting the PM fees, rental fees and my properties getting free and clear during these 5 years.

In 5 years, it's going to be 1.5 houses worth $75K, cash flowing $900/mo (right now it's $600/house per month)

Soooo, what would I have without money?!? Nothing, big fat zero.

What would my cash partner had if I wouldn't agree on that? He wouldn't have anything as well because he's out of country and can't even find a decent PM, leave alone someone able to find a deal like that.

Does it still look like "so what"? Looks like win-win to me....but off course, what do I know? I don't know anything about money ;)

Originally posted by @Samantha Schwartz :
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.

 typically this is where folks get confused with your great idea and their money and your idea or work is worth more than the money.

but to be fair and balance you should at least get a management fee for on going services.. but its not uncommon to have first money out go to the money.. after all there would never be any deal with out the money and those with the money can just do it themselves and hire a PM.. 

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