Putting together my first deals and a plan
Hello.
This is my first post and this is an idea I have been thinking of the last month or so...
I own a single family rental property. I've owned this place 26 years and have rented it the last 22 years. I've only had one tenant in 22 years. They are retiring and moving to a smaller home. The place needs a good amount of work (floors, paint, windows) and updating (new garage roof, kitchen update)
I have a childhood friend who is a licensed contractor. He has been working for two other people we went to school with. He has been doing their house repairs, property inspections, and property maintenance for them. They have become quite successful, and I would like to follow suit. My friend would like to get his own properties. He has some money saved, but bad credit.
I would like to work out a plan to jumpstart us both into the rental world. I would like to see us both become secure from investing into real estate that can provide a monthly cash flow and future equity.
This is going to be my proposal to him. I understand it may not be the best deal for me. I am trying to make it so we can both start off and grow. I figure I have to ask him to give, and I also have to give. This is what I came up with:
I want him to evaluate the property I own. I want him to create and give me an estimate on repairs and improvements that he thinks the place needs to get it to rent for top dollar. (I currently have roughly 100k in equity and 50k left on the loan. I rent it now for 1100 a month, super low considering the tenant. I feel with updates I can get 1800 a month).
I will propose that whatever the estimate come in at (we'll say $30,000) I will offer him up to a 25% ownership into the property if he takes care of the repairs himself (labor and materials). This will depend a lot of what he thinks it will take to get the property to where it needs to be.
For example, if his estimate is 30k, I would offer him 25% ownership of the property that would put him at roughly 40k of equity. I am also thinking some sort of cash flow split of 75/25 all depending on the estimate and what we actually figure out. As I assume I can work out some type of property maintenance from him also.
I figure this is a win win. This gives us both equity. This gives us both cash flow.
This is the start. this gives us both our footing into a foundation. From here we start buying properties together. This would be a commitment to move forward. That we would have to buy at least one property per year. I would only be doing this deal to start something for both of us, not this one deal only.
How I see it, his improvements to the house will not only create a higher rent, it will also increase the value of the house. His 40k in equity could jump to 50k in equity by the time he is done with repairs.
My proposal to him would be after the repairs are done I would do a refinance on the house to pull the equity out. We would then split the equity 75/25. At that point he would basically get his investment back that he originally put in, in trade for his monthly cash flow would decrease to pay back his 25% of the equity loan. From here this gives us both capital to invest into out next property where we would go in 50/50.
Is my thinking on the right track?
Should I propose this? Or should I just hire him? (I know hiring probably makes the most financial sense)