notes

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I am doing more income stream deals and want to know if this is a good approach for a passive investor for a jv partnership deal. Any inputs would be appreciated. We are putting a tenant buyer in the house for $5000 down and $895 per month. purchase price $110,000

Investment $75,000

monthly cash flow for investor (roughly) $500 a month

1-2 years collect the monthly payments until the date of sale.

At which point they get their principal back plus (roughly 10,000-15,000)

It's a jv partnership deal...not a lending deal. I've done jv deals on flips, not on rentals or rent to owns. Advise (even brutal in need be) appreciated. Is it a good deal for the investor? Any adjustments before approaching?

Depends on the investor.. 8% I/O plus a ~15% carrot in 24 months might be attractive.

However, if the buyer doesn't perform, what is the back up plan? 

That would be an attractive return for a SDIRA investor looking to place capital on a short term. Not sure why you posted in this forum since it has nothing to do with notes??

I believe it's similar to notes in that the investor would be investing in passive income  and they would use the house as collateral.  A $75K purchase on collateral worth about $110K.  Instead of  a deed of trust, they would actually use a deed as security which seems like it's even better.  

If the buyer doesn't perform in purchasing the house, they would lost $5000 of option money and we would put another tenant buyer with similar terms or even higher price point.   

So far in the business I've been able to raise money from people in the business...but not necessarily people out of the business..  It sounds like investors who are not in the business may be a better target.  I'm not sure how to approach that.  

@Marilyn Adams

If the buyer defaults, who gets the $5,000? Are you going to pay the investor 8% even if the tenant is in eviction? Lots of variables here that you need to iron out. I personally would be looking for more than 8% given the high rate of default of lease options. I'd take 15% interest only with 2 points 1st position, and you can keep whatever "extras" there are in terms of defaults or outright purchase 

Be careful about calling it a rent to own, you can run afoul of Dodd Frank.  Lease options are doable though and that is what this sounds like.  If any part of the rent is credited towards the purchase then be careful.

Originally posted by @Marilyn Adams :

I am doing more income stream deals and want to know if this is a good approach for a passive investor for a jv partnership deal. Any inputs would be appreciated. We are putting a tenant buyer in the house for $5000 down and $895 per month. purchase price $110,000

Investment $75,000

monthly cash flow for investor (roughly) $500 a month

1-2 years collect the monthly payments until the date of sale.

At which point they get their principal back plus (roughly 10,000-15,000)

It's a jv partnership deal...not a lending deal. I've done jv deals on flips, not on rentals or rent to owns. Advise (even brutal in need be) appreciated. Is it a good deal for the investor? Any adjustments before approaching?

 Here are a couple points

North Carolina have some screwy laws about getting a tenant buyer that defaults out of the property legally.

The landlord-tenant court even if you have separate lease separate option Will not hear your case and you need to go to a special magistrate court

The best thing you can do is to get registered mortgage loan originator and talk to them about doing something seller financing deal on the property

You may want to sell it on some kind contract for deed instead of a lease with option in the state of North Carolina

RMLOs or registered mortgage loan originator's should always be sought out when you're doing any kind of lease with option or contract for deed or wraparound mortgage

Another alternative is a lease purchase arrangement where the tenant signs a standard lease issued by North Carolina real estate Board and a sale and purchase agreement with a closing in the future like 12 to 24 months.

good luck Marilyn

These days you're doing great to get someone to pay you 15% interest with 2 points.  Here standard is about 12% even with savy investors who is in the business of hard money loans.  I've paid as high as 20% on a rehab but am learning that there are a lot of investors out there that are happy with the 12% return on their money....as long as they receive it in 6 months (amortized over 12 months still) .

In this situation the person to attract are those who are not the business and who may need to diversify their investment port folio as an alternative to stock.   8% is the monthly yield and at the end of the term they would get that plus 1/2 the profit which would be well over 8%.  Even if it takes 3 years for them to get their money they would receive a total of $28,000-33,000 spread over 3 years which would be over 12%.  If it takes less time then they would receive an even higher rate of return.    Of course there are risks and variables.  The bottom line is if they want a super safe investments they have to be happy with a 1.5% rate of return at the most.  There are risks of course.  But they still have a security worth $110k.     

This thing screams predatory deal.

First thing first, what you are describing is a bond for deed or land contract or installment contract.  You can call it what ever you want but that is what it is if you pass property liability to the buyer.  It is absolutely not "safer" or more "secure" for either party.  Those are antiquated instruments used primarily as predatory devices.  This one seems no different.

Secondly, I don't see any JV'ish thing here at all. I see an investor acting like a lender in equity and that part I am not even sure it is being done correctly. What is your role OP?

Find the property.  Find the buyer.  Determine the credit risk on the buyer?  Welcome to needing an RMLO license.  You are negotiating credit between a borrower and a lender (in equity as the title owner).

That prompts me to ask structurally how do you earn any money, specifically?

If the investor purchases the property for $75,000 and then the property is sold to a new buyer at $110,000 in an instrument.  Writing or negotiating that instrument is a licensed event if you are not on title to the property.  If it recognized as a lease you need a real estate license and if it is recognized as a credit contract you need an RMLO license.  Do you have either?

Your payment skimming will be an issue.  I am guessing the $395 after the investor get's his $500 is yours.  You have no capital funding the deal and you have no equity if you are not on title.  So you are just skimming payments with no actual investment being made.  An issue onto itself. 

Further, in the thread I don't see where the amounts contributing to the pay down of the obligation are discussed.  So buyer/borrower pays $895 per month.  How much goes to paying down the $105,000?  

A 24 month interest only balloon?  - That exact example is used as an example of predatory terms in Dobb Frank commentary.  

It is not just as simple as giving or not giving principal credit for payments.  It goes into who can take deductions and enjoy the equity appreciation.  Those types of structures, which this one sounds like it would have also, are problematic in enforcement.  You are in fact equity skimming the buyer/borrower by passing all the liability to them and giving them no equity for it.  

If they are deemed to have been earning (or paying for) equity, then you will not simply be able to evict.  They will have to be granted a redemption and the process will look like a foreclosure not an eviction.    

In that process the buyer/borrower can likely bring up the idea that they could not afford to pay.  Either the monthly payment or the balloon event.  If they prove that, the selling parties (the whole lot of you) could owe all the money back plus damages to the borrower.  

All in all this is a bad idea and structure.  Stop trying to be creative in finance that is going to get you into serious hot water.  Nothing about the structure described here is safe or secure for any of the parties.   I don't see a way you put this together without it being a huge red flag as described herein.  

Caveat Emptor.

I am  a principal. I own the house am am selling this the house we found,  bought at a discount, and fixed up. . I'm selling it for 1/2 the equity  (1/2 of 35k on the back end  ...minus expenses that go with transaction costs)    a little less I would take for the income stream.    I'm selling my house for a portion of the equity and income spread it brings .  And do all the work.   It's not that creative .

btw,  I  would never put a tenant in without screening them first and running it by a loan officer to get a picture if realistic chances of qualifying within 1-2 years.   

That said I still wasn't sure about the deal which is why I posted it.  Just to get a clearer picture and bounce ideas off of people in the business.  No need to be insulting :-).  

Happy investing :-) :-) :-)