How I Made Substantial Wealth “Partnering” with Passive Investors

[Don Konipol]

Throughout my 50 year career as a real estate investor, I "juiced" my ROI, accelerated my wealth building, and increased my net worth by offering participation in my "deals" to passive investors.

Passive investors want to invest in real estate or real estate related investments, they just don’t want to “do the work”.  No problem, I’ll do the work, and get paid for my experience, expertise, knowledge and “deal making” ability. 

Two examples will illustrate.  

I had negotiated to purchase a seller financed mortgage loan secured by an office warehouse building in Ft Worth, Texas.  The principal loan balance was $250,000, the loan paid interest at 11%.  I purchased the loan discounted for $212,000.  
I then proceeded to sell a 1/2 interest in the note to a passive investor for $125,000.  She was very happy to be receiving a 11% interest on her money.  I was then in the note for $212,000 minus the $125,000 I received for selling half the note.  So my net investment for my 1/2 interest was $87,000.  My share of the note principal was $125k and my share of the interest was $13.750.  In addition I received a 1% servicing fee, so my total annual income was $15,000.  On a $87,000 that works out to a 17.2% annual return!  If I would have retained ownership of the entire note, my return would be 11%, significantly less.

The note was paid off in full 4 years later. So I received $125,000 as my half of the payoff (the monthly payments had been  interest only).  On a $87,000 investment that’s a 44% return.  Divided by the 4 years I held the note that’s 11% annual.  So my total annualized return was 28%.

If I had not sold the half interest, the payoff would have netted me $38,000, or 18% return.  Divided by 4 years, that’s 4.5% annual.  Added to the 11% interest, we have an annual return of 15.5%.  By selling the 1/2 interest I increased my total annualized return over 4 years from 15.5% to 28%.

Second example.  I negotiated the purchase of a bar/restaurant with a 3N lease in Joliet, Illinois for $400,000.  The seller was the operator of the bar, his brother was the operator of the restaurant, and the agreed rent for both was $3600 per month, triple net.  The seller had an option to buy back the property for $475,000 for 3 years. 

I sold half interest in the property to a passive investor for $217,000.  Beside receiving half the rent or $1800 per month, I received a management fee of $360 per month.  When the seller exercised his buy back option, I received my half of the $475,000 or $237,500 plus a previously agreed to $7,000 “disposition” fee. 

Let me know what you think about this strategy