Seeking your advice on a deal - your help is much appreciated!

7 Replies

Dear All,
I’m in the process of finding a rental property for either tax shield purpose for my regular W2 income or getting great cash flow if I can find such deals, and My friend came to me for an investment opportunity. She's been a real estate investor for a couple of years doing wholesale, fix-n-flips. I would like your advice on this deal. Please help me to analyze if this is a good deal, and if the split between my gf and me is fair. If the structure of this deal is not fair, how would you structure it? Your help is much appreciated!

Property Info:
This a house (2 Bd, 2 bath) with a store front in Northern CA. I'd have to get a commercial loan for this deal. The monthly payment is approximately $2,500, and the expected rental income is about $4,500. So our cash flow is about $2,000. We plan to do lease to purchase agreement with the renter with an option to purchase after 5 years (with 3% appreciation each year). And the tenant has to agree to put an upfront payment of $20k with the guarantee that $10k will be refunded to him if he purchases the property at the end.

My friend’s contribution:
1. She found the deal through her contractor.
2. She’ll secure the tenant.
4. She comes up with 50k down.
5. She manages the property.

My contribution:
1. I’ll come up with 100K down.
2. I'll borrow the loan under my newly formed LLC.
2. I’ll have my real estate attorney friend review the least to purchase agreement & the agreement between my friend and me.

Our Split:
1. Monthly cash flow – half and half
2. Equity – 60% to me & 40% to her
3. Tax shield if any – belongs to me

Your help is so much appreciated! Have a nice day!

Best Regards
Kate

Your cash flow is far less than $2000. You have many costs beyond taxes and insurance.

Is your AGI I've $150k? You can only use passive losses from rentals to offset ordinary income if it's less. For AGI under $100k you can use up to $25k of passive losses to offset other income. Over $100 k that phases out $1 for every $2 of income over $100k. Consult a CPA before doing the deal.

Mixed use is tough to finance. Hopefully you're not assuming 20% down 30 fixed in your calcs.

Idk if it's a good deal. You didn't say what you're paying.

Jon Holdman, Flying Phoenix LLC

I think if you are puttin up 2/3's of the capital and you are providing the financing you are taking alot of the risk. I would think you should get a bigger peice of the equity split at least, how much that is up to you i guess.

I am assuming if its a newly formed LLC you are personally guaranteeing the loan correct? Is there alot of work to get the property to a rent ready state?

The 50/50 split on the income makes sense if she is managing i guess but i still think you should be getting a much larger peice.

Just my thoughts.

That being said being greedy can leave you owning nothing. I have given up alot of money on deals i turned down because i wanted more :)

@Jon, thanks much for the info. on tax. Please clarify what other cost do I have beyond PITI. The property's condition is good...doesn't need repair. You're right about it's difficult to get financing on this deal. But I might be able to find lenders that can finance this deal. Our down is about 30%, 5 or 7 year arm.

@Rejean, thanks much for your analysis. About the newly formed LLC, I believe I have to make personal guarantee. And you're right on the spot...I personally feel this is not a fair deal for me as I'm putting in more equity and assuming the risk. But the cash flow is what attracted me to the deal. Originally we agreed on borrowing loan under her LLC, but now she wants to do it under mine. That's why I'm hesitating and trying to get some advice here. Oh well, need to reconsider this deal and restructure the profit sharing. If the loan is under my name, I may just pay her some commission for finding the deal & tenant and pay her a set monthly management fee. And I'll keep all the monthly cash flow. If she agrees, we proceed. After all, I don't want to give up a lot of money on good deals. Gotta practice my negotiation skills now! heheh.... :-) Wish me luck!

Mixed use loans at 75% of purchase price are available, at start rates as low as 7.49%, 3 year fixed, 27-year ARM for a total of 30-year term. These loans should be used only if you are not able to qualify for lower rates, which may be the case if you do not have landlord experience, and you have a newly formed LLC. Most of these loans are based on the value of the building and the income stream, and not on a personal guarantee.

@ Dave, thanks much for the loan info.! I have landlord experience in residential. Mind to share the lender info. for the loan you mentioned above? I'll try to get a loan from a lender that can offer lower rate. If not, I might have to go through one of these lenders you mentioned above. Your help is much appreciated!

@Ali, listing price is $490k, we are trying to nail it at $450 or below.

@Dave, a couple more questions regarding the loan you mentioned above:

1. is there pre-pay penalty?

2. is there point charge?

3. is the lender reputable?

Thanks so much Dave!