What kind of return is typically promised to investors of rental properties?

6 Replies

Say I've a quad that I have no money to put into, but I have an investor who does have the cash. What is a typical arrangement between the investor and I? Once I buy the property we split half of the monthly income, and then us splitting profits once the property is sold? Is this just one way of doing it?

The person putting up 100% of the cash on a rental should get 80-95% of the equity and income. If you're managing it then move another 10% of the monthly cash flow to your side but that's about it. If you aren't bringing equal value to the deal why would you expect an equal share?

as the money investor I would definately want you to handle everything and show that you know what you are doing already as well. Still I would say a 50/50 split is pretty hard to swallow unless it is a fantastic deal and you have a proven track record. If I was in your shoes I would see if you can structure as purely debt from the investor with a mortgage backing. You would need to purchase with some equity or a quick path to create it as 100% financing is risky for an investor even at ~12% interest.

You will get many different opinions on this one :)

I only have one duplex right now, bought in a partnership with two other SDIRAs. So it is an 'all cash' purchase since it did not qualify for most Non-Recourse Loans.

I/We are looking at more rentals. We are considering both going the non-recourse loan route and making sure the next property(s) would qualify, and also looking at a couple of 'owner financing options. In the second scenario, we would just be paying a fixed interest rate to the owner for a set number of years. Part of how we could make that work is our reputation in business dealing in the smallish town we live in.

So I guess my question is; why not just borrow the funds from your potential partner? This would put (theoretically) all of the 'profit' into your pocket, and still give them a decent return too.

I think Patrick hit it on the head otherwise in general with 'why would the investor not want almost all the income if he is taking ALL the risk'? I have looked at partnering like you are talking, and if you can find the lending in your situation, it is almost always financially better for you to borrow and keep the profits.

Good Luck, DKC

Great question @Christopher Albritton

I partner with many professionals that have tons of cash. On flips they provide all the cash and we split the profit 50/50 upon selling after deducting all expenses. Again they are just the bank. I am the true "General Contractor" not to be confused with project manager (I Manage the ENTIRE project to include actually having the ability to drive nails) not just take 10%-15% for "managing a project"

If they decide to hold the property for rental I get 50% of the ARV minus all the expenses of course (including all expenses to get it to turn key).

I never enter into partnerships when it comes to the rental per se. If they want my property management co. to over see the management of the rental we have a fee schedule for that but it is a totally separate agreement.

Awesome, thank you all for the quick, informative responses!

If an investor is putting in 100% of the cash then we need to know what you're doing to earn a stake in the property.  Just buying it is minor.  That's going to get you only a small slice of the returns.  For a fix and flip, a 50/50 split it typical.  But managing a fix and flip is a fairly big job.  And you and the investor are in and out of the deal in a few months.  With a buy and hold you're in for the long term.  If an investor is putting in 100% of the cash they can hire a PM and have essentially the same sitaution as you're offering.  A PM will typically get 10% of the collected rents plus a half to a full month's rent to fill a vacancy.  If you're doing the PM job (and, in most states, have a license) then you could collect those fees.  But very unlikely an investor would split the net profit (with all expenses including the manager) with you.

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