Have a good property but I'm low on cash. Does this deal work?

Question

Property purchase price is $100k

Total monthly Rent is $2,000

After all expenses are paid, including management of $200 per month, the cash flow is $600 per month.

I found this deal, but due to other pending deals, I do not currently have the cash for the down payment. I have a potential investor, who wants to invest in real estate but has no real estate experience. Here is the offer I want to make to the potential investor. He pays the down payment of $20k. I pay all closing costs, and we are 50/50 partners in the deal.

I will handle 100% of the management and get paid the $200 per month to do so. Basically, I get into the deal for very little money down. He gets into a deal that he didn't previously have. Other than making the down payment, he is completely hands off, and he still gets $300 per month on his 20k investment which is 18% yearly. I think this is a win win.

Am I missing anything. Is it not a good deal for me? Is it not a good deal for the investor?

Bruce Clark · Answer

@John Thedford I calculated repairs, capital expenditures, and vacancy each at 5% of rent (15% or $300 per month). The property is in pretty good condition overall, so this should be more than sufficient.  I own other properties in the area of this property so I have a pretty firm understanding of the expenses and I am very conservative with estimates before purchasing anything. I definitely agree though. There are always unforeseen things that come up and you can never plan for everything.

Thanks for the advice.

John Thedford · Answer

Did you calculate the income correctly?   PGI  potential gross income- VCL  vacancy and collection losses=EGI   effective gross income  -OE    operating expenses=NOI  net operating income

It is the operating expenses lots of people miss out on....plus vacancy allowance.What is it goes vacant after the tenant moves? Does he still get paid that month?Did you figure an allowance for vacancy? You should.What if you need to do a capital expenditure? Have you allowed for that? You should.What about operating expenses? Maintenance? You should figure those in as well.RE is a great investment but you can get hit with unexpected costs. Lots of people don't calculate their income correctly. Using this formula is a great help. Mortgage interest is NOT an operating expense..but in your case, AFTER you have NOI---you need to factor that in.

Bruce Clark · Answer

@Cody L. I will set up an LLC and the loan will be in the LLC's name. As 50% owners of the LLC we will also have to sign as personal guarantors. However, I already own and manage several properties that I have financed through 2 different banks. So I will actually do the leg work and arrange the financing. Given that I have relationships with these banks and they know that my properties have always been profitable, I should have no issue. I think it may be a little more of a challenge for the potential partner to approach a bank with no current rental properties and no real estate experience.

Bruce Clark · Answer

@Alex Deacon Yes I will set up an LLC for this deal. I am an attorney, so I definitely understand the importance.

I have been managing my own properties for 4 years, so I consider myself relatively experienced in regard to property management. Also, the property is located within a half hour of my house. The potential partners lives about two hours away, so I will be the "boots on the ground" so to speak. Even with that said, I think you might be right. I may consider reducing the 10% fee.

As far as him getting his original investment back, I think that would be a little much. He puts 20k in and then he gets an 18% return. He will get his money back in 5-6 years. Plus his 20k is represented by the 50% interest he has in the property. If we were to sell, then he would get 50% of the proceeds. I think he either needs to be a lender, in which case he gets his money paid back to him but he has no interest in the property or he is a partner and he shares in the profits but does not get his money back per se. That's just my thinking though. Maybe other see it differently.

Alex Deacon · Answer

@Bruce Clark always check with your accountant to see how this will work out come tax time. also are you creating an LLC for this one deal.

To be devils advocate if I were the investor putting 20% down i would want paid back my investment with interest over time. say 5 years at 4% interest. meaning the property would have a 1st and a 2nd mortgage. As far as you getting paid to manage I think 10% a little steep especially for one higher end rental and  with your limited management knowledge. (unless of course you have a lot of knowledge I am just assuming this).

Regardless if you get a good CPA he will keep you in check. i work with lots of different partners and have formed countless LLCs and its super important to keep the books clean. You will be sorry if you dont and the IRS audits your return. Its not fun but my books are clean due to my CPA and the audit went without a hitch.

good Luck.

Bruce Clark · Answer

Will do @Doug Woodville. Thanks for the feedback.

Doug Woodville · Answer

If I had the $20k that would seem like a pretty good deal. In fact, contact me if this person doesn't pull the trigger on it please @Bruce Clark.

Have a good property but I'm low on cash. Does this deal work?

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