Private Investor Wants 50% for 0% work Advice

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Private Investor Wants 50% for 0% work Advice

Tom R.
Specialist · Cypress, TX · Member since 2017 · 23 posts · 13 votes

OK, here is the situation I'd like some creative financing / deal structure ideas please.

I have a deal/property & I approached a private investor friend with:

I originally structured the deal to him as a 'debt' only investments:

  • IE: Investor put in 100% and received 10% interest over 18 months. 
  •   After 18 months I refinance, pay investor 100% of capital.
  • I keep property and we 'lather, rinse, repeat' another property.

 I was planning on vetting property, managing rehab, managing property mgt, managing finances (payouts, etc) managing LLC (asset protection strategy), etc., etc., etc. :)

However!!!! He has a change of mind and now wants the following:

  • 50/50 investment (he pays half, I pay half)
  • 50/50 ownership
  • 50/50 cash-on-cash rent pay outs.
  • He wants NO management or ongoing responsibilities.
  • IE - I do property vetting, mgt of rehab, mgt property, mgt finances, mgt llc, etc.

My question to all of you very smart & creative financial folks is this:

How can I structure this deal that make more sense for both of us. He is holding strong on him doing NOTHING other than provide 50% of the upfront cash while wanting 50% of the assets.

As a side note, he (my friend) is sitting on a huge pile of liquid assets to use towards "investing".
I know he is very nervous going into REI, but if we pull this off and he feels comfortable I know we can take down many more properties. So I really want to try and make this work for the upside of future deals.

Thank you so much for reading my post and I look forward to your replies.

P.S. Yes, the numbers are solid and the SF property will be +CashFlow, etc

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y

Well Tom I am going to take the other side of the argument here.. If you have no capital then what worth are you... plenty of people with money can simply do this on their own what value do you bring.. this attitude that you do all the work and the money should take less is what keeps many from ever doing ANYTHING>.. when in fact what you should do is jump at it just so you can get started.. other wise you will waste a ton of time looking for that fairy god father investor who is just begging someone with little to no capital no real experience and willing to ONLY take 10% on their money.

these folks could go into REITS Crowdfunding DEALS HML short term.. many other investment that would be safer than doing a deal with you for a measly 10% return... that is wishful thinking and very short sided ... I see it all the time... thinking your value far exceeds what it really is.

this is not rocket science buying and managing a rental.. there is no real skill to it.. its as easy of a RE transaction as you can do.

So that would be my counter point and devils advocate to all the people above who took your position of your bringing more value than the money   @Diane G.

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  • Brock Y.
    Investor · Lake Villa, IL · Member since 2014 · 90 posts · 48 votes
    9y

    @Tom R. Are the potential future deals still going to be 50/50 investment? If so, I would consider looking for different partners. There are many people with loads of liquidity that would be happy with the 10% interest. If this is just a trial to see how the partnership will go and he will be a 100% investment silent partner for future deals then I would take the current deal as he proposed. 

    5Reply
  • Michael Le
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    I wouldn't do it. You can find other private money lenders out there. Even a hard money lender will come out to less than the 50% you're giving up.

    10Reply
  • Kevin Bonner
    Homeowner · Orange County, CA · Member since 2017 · 15 posts · 9 votes
    9y

    Interesting situation. I'm pretty new here and may not be of much help, but I have a few thoughts. On one side, 50% of capital is still half of what you need. Plus, the investor would take on 50% of the risk correct? And then, the investor still has 50% more capital to put into your next property, right?

    On the other, you are doing all the work, and essentially, the investor gets more return than you since you lose all of the time associated with the property. Maybe you can propose a 60/40 split on cash flow to compensate you for your time. 

    It sort of depends on how badly you need that other 50% of capital, or if you can get financing for it. Or, have you asked if the seller would finance you the extra 50% with the terms you proposed to your investor friend? I think 10% return for 18 months, along with all of my investment returned after those 18 months is an incredible opportunity.

    1Reply
  • Diane G.
    CA · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    It depends on what money you have and what experience you have....

    If you have $0 money to invest, no HML will work with you...I, for one, would never work with anyone with $0 out of his pocket...

    If you have no experience, again, no HML will work with you......

    His proposal is about what you can get, assuming your time and effort on managing the project are properly compensated?

    6Reply
  • Tom R.
    OP
    Specialist · Cypress, TX · Member since 2017 · 23 posts · 13 votes
    9y

    Hi @Brock Y. thanks for the insight.

    That is a concern of mine, the move forward strategy with him. 

    I do not have the liquid assets or capital he has to front 50% outside of this deal. So yes, I am very concerned that is his how he wants all 'future deals, 50/50'

    So what I am hoping to do now, with the help of you all smart folks, is craft a deal that I can present that will take away this 50/50 mindset so it is not his expectation for this & 'all future' deals.

    If I ("we BP folks.:) can figure out an alternative deal structure then I'm sure we can close this deal and work on others.

    If I cannot figure out a creative alternative to his current 50/50 offer then yes I will have to walk.

    0Reply
  • Diane G.
    CA · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Tom R.

    I don't know how much fund/experience you have....maybe walk and shop around will help you appreciate his proposal more....

    2Reply
  • Tom R.
    OP
    Specialist · Cypress, TX · Member since 2017 · 23 posts · 13 votes
    9y

    Hi @Michael Le - Thanks for the reply. I can see your point and it is a concern of mine. 

    But, as you know there are so many 'nuances' to a deal/relationship that I cannot express via a forum post.

    That's why I am really working to see if I can figure out a way to make this work.

    But a 'bad deal' is a bad deal and sometimes you do have to walk.

    1Reply
  • Tom R.
    OP
    Specialist · Cypress, TX · Member since 2017 · 23 posts · 13 votes
    9y

    Hi @Kevin Bonner -  thanks for the insight. I have been noodling around a way to offset my time via cash flow variance. 

    But even with that strategy we'll only be able to do this one deal since I don't have the cash flow after my 50% into this deal for other future deals. 

    Since the "PI" go forward strategy with me is 50/50 on this an future deals.

    0Reply
  • Daria B.
    Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes
    9y
    Originally posted by @Tom R.:

    OK, here is the situation I'd like some creative financing / deal structure ideas please.

    I have a deal/property & I approached a private investor friend with:

    I originally structured the deal to him as a 'debt' only investments:

    • IE: Investor put in 100% and received 10% interest over 18 months. 
    •   After 18 months I refinance, pay investor 100% of capital.
    • I keep property and we 'lather, rinse, repeat' another property.

     I was planning on vetting property, managing rehab, managing property mgt, managing finances (payouts, etc) managing LLC (asset protection strategy), etc., etc., etc. :)

    However!!!! He has a change of mind and now wants the following:

    • 50/50 investment (he pays half, I pay half)
    • 50/50 ownership
    • 50/50 cash-on-cash rent pay outs.
    • He wants NO management or ongoing responsibilities.
    • IE - I do property vetting, mgt of rehab, mgt property, mgt finances, mgt llc, etc.

    My question to all of you very smart & creative financial folks is this:

    How can I structure this deal that make more sense for both of us. He is holding strong on him doing NOTHING other than provide 50% of the upfront cash while wanting 50% of the assets.

    As a side note, he (my friend) is sitting on a huge pile of liquid assets to use towards "investing".
    I know he is very nervous going into REI, but if we pull this off and he feels comfortable I know we can take down many more properties. So I really want to try and make this work for the upside of future deals.

    Thank you so much for reading my post and I look forward to your replies.

    P.S. Yes, the numbers are solid and the SF property will be +CashFlow, etc

    Clearly you have established a good business deal with your friend. But business is also business and when doing business with friends I tend to think the lines can get blurred. 50% profit for not helping in any way to mgt or vet, essentially you doing all the work, I don't see that as a good partnership. Seems like are doing all the work and giving away your profit.

    2Reply
  • Mike Wood
    Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
    9y

    @Tom R. Given what you have stated, I would not do that deal.  Your carrying the majority of the workload.  Its a bit tricky given it appear that you are looking to buy, renovate, refi and hold.  If it was more a a fix and flip, you would offer 100% financing with interest and a portion of the profit.  

    If you could come up with the 20%, you could use conventional financing (though I understand you dont have access to that capital), thus the 50% seems silly to me.

    0Reply
  • Tom R.
    OP
    Specialist · Cypress, TX · Member since 2017 · 23 posts · 13 votes
    9y

    Hello @Daria B. thanks for the post.

    Yes, you are correct. IF, however we maintain the 50/50 across the board deal.

    0Reply
  • Tom R.
    OP
    Specialist · Cypress, TX · Member since 2017 · 23 posts · 13 votes
    9y

    Thanks @Mike Wood - good points and you are correct the strategy with this one is a Buy, rehab, rent, refi - hold...

    I have a few ideas thinking through this and will post an idea for you all to 'pock holes in'.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    Well Tom I am going to take the other side of the argument here.. If you have no capital then what worth are you... plenty of people with money can simply do this on their own what value do you bring.. this attitude that you do all the work and the money should take less is what keeps many from ever doing ANYTHING>.. when in fact what you should do is jump at it just so you can get started.. other wise you will waste a ton of time looking for that fairy god father investor who is just begging someone with little to no capital no real experience and willing to ONLY take 10% on their money.

    these folks could go into REITS Crowdfunding DEALS HML short term.. many other investment that would be safer than doing a deal with you for a measly 10% return... that is wishful thinking and very short sided ... I see it all the time... thinking your value far exceeds what it really is.

    this is not rocket science buying and managing a rental.. there is no real skill to it.. its as easy of a RE transaction as you can do.

    So that would be my counter point and devils advocate to all the people above who took your position of your bringing more value than the money   @Diane G.

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  • Mike Wood
    Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
    9y

    @Jay Hinrichs I agree with a lot of what you said, but this being a buy, rehab and hold means it would require significant time managing the process.  If the investor does not want any involvement in that process, the 50-50 split seems lopsided.   If it was a simply buy and hold, I totally agree with your comments (even though I am not sure 10% return is measly in these days and times).

    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y
    Originally posted by @Tom R.:

    Hi @Brock Y. thanks for the insight.

    That is a concern of mine, the move forward strategy with him. 

    I do not have the liquid assets or capital he has to front 50% outside of this deal. So yes, I am very concerned that is his how he wants all 'future deals, 50/50'


     Forget 'future deals'; if this one fails you have NO future, so as the line goes:

    1. Here's to making it count.
    3Reply
  • James MasottiPro Member
    Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
    9y
    Originally posted by @Jay Hinrichs:

    Well Tom I am going to take the other side of the argument here.. If you have no capital then what worth are you... plenty of people with money can simply do this on their own what value do you bring.. this attitude that you do all the work and the money should take less is what keeps many from ever doing ANYTHING>.. when in fact what you should do is jump at it just so you can get started.. other wise you will waste a ton of time looking for that fairy god father investor who is just begging someone with little to no capital no real experience and willing to ONLY take 10% on their money.

    these folks could go into REITS Crowdfunding DEALS HML short term.. many other investment that would be safer than doing a deal with you for a measly 10% return... that is wishful thinking and very short sided ... I see it all the time... thinking your value far exceeds what it really is.

    this is not rocket science buying and managing a rental.. there is no real skill to it.. its as easy of a RE transaction as you can do.

    So that would be my counter point and devils advocate to all the people above who took your position of your bringing more value than the money   @Diane G.

     I'm with Jay on this one here. Without this invest it sounds to me like you've got nothing. And as @Brandon Turner says. 50% of a deal is better than 100% of no deal. I'm in the process of forming a new JV right now and offered to take less than 50% even though it was pretty much I do all the work and he does all the money. Now we ended up agreeing on something a little different...so that we are likely going to do 50/50 but...it's the experience which is going to matter and help me. If you really want to agree to all his terms but build into the operating agreement a sliding equity scale. Start of 50/50 or maybe even 60/40 in his favor. Then after each successful year of the partnership your "work" buys you additional equity in the investment until you reach a 40/60 equity split in your favor. This way he has some hedge on his initial risk of partnering with you while you have no experience, and you have the upside in that as you continue to prove to be an asset to him in the long run, you are compensated for your growing experience and success

    Many will say, and I truly believe this, real estate is a get rich slow game. Sure there are a hand full of investors out there who strike gold. Or who are marketing wizards and can wholesale 1000 properties their first year or something like that. But for the average investor who is just getting started out and has a full-time job on top of their investing...go with the slow role....that snowball picks up speed and weight much faster than you'd realize. Get in the game with whatever equity you can. 

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    9Reply
  • Tom R.
    OP
    Specialist · Cypress, TX · Member since 2017 · 23 posts · 13 votes
    9y

    Hi @Jay Hinrichs - I see you're very active on BP, so I appreciate you chiming in.

    However, in your statement you make very many incorrect assumptions and broad stroke generalizations as they apply to my experience, financial status and overall understanding of the people I am working with.

    While I do appreciate the dialog with you I am not looking to debate incorrect assumptions and generalizations that may not apply to what I may or may not have & the sophistication of the folks I am engaging with. 

    I am however, looking for insight into this specific deal & insight into how one may restructure some creative %, splits, etc.

    Even with the above said I do appreciate the 'devils advocate' slant you took. 

    3Reply
  • Tom R.
    OP
    Specialist · Cypress, TX · Member since 2017 · 23 posts · 13 votes
    9y

    Hi @James Masotti - thanks for the input. I'll work that idea of the sliding equity into my financials and see how those numbers roll out.

    0Reply
  • Account Closed
    Greensboro, NC · Member since 2016 · 45 posts · 20 votes
    9y
    Tom Reid Could you go with the 50/50 approach and do something like ... - Investor pays 50% of acquisition and you (or the LLC) mortgage the remaining 50% of acquisition cost. - Investor funds all rehab and holding costs. (This assumes you are not going into the deal with substantial capital to fund rehab or reserves.) - You manage everything, get the property rented and seasoned, and earn your sweat equity. In the meantime, you and the investor split net cash flow 50/50 or at other agreeable terms. - After seasoning, refinance the property, cash out the investor (with a solid return on the investors capital) and you hold the property from there on. - Repeat the process. With a proven track record maybe the investor will loosen up on terms or do multiple investments concurrently with you. Until you have enough investable capital accumulated, it will be a challenge controlling the terms of any investor or lender. If the deal you have in your sights is phenomenal (like it could appraise for way over your purchase price), you may have luck finding a HML to fund acquisition + rehab but the terms will likely be ridiculous.
    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Tom R.  just replying to what you personally wrote were you state you have no liquid assets.. so if that is not the case then  that is something completely different..

    I am just taking the slant of how an investor looks at these deals.. as I have been working with investment funds and investor for many decades... so I kind of have a pulse on how the majority thinks about these deals.. and as such again my personal opinion is buy and hold is not that difficult to do by any stretch so the value proposition from the work partner is not that valuable given a mere 10% return on 100% investment into the deal.. just is not in the real world of attracting a capital in any appreciable amount..  Friends and family and small little partnerships maybe..

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Mike Wood  10% is very simple in the performing note game... and other investment vehicles with probably a lot less risk as well.

    My main point to take devils advocate here is for others who read this and wonder how do I attract capital when I have none but I want to get in on the equity side..

    and that is to always give the money the lions share until you have a stellar rep..

    I mean I still do this to this day... and that is why I am NEVER without more capital coming at me than I can deploy.. I take care of the capital FIRST me SECOND>. not the me me me attitude I see with investors starting out or looking to bring in outside investors for the first time.. they simply don't know.

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  • James MasottiPro Member
    Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
    9y

    @Jay Hinrichs - I've seen you mention a few times that 10% isn't that great of a return for a lot of experienced investors that have plenty of capital to deploy. At the level of investor that you are dealing with, from your experience what type of return are they typically looking for? 

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    0Reply
  • Ben Shaikh
    Rental Property Investor · Rochester, NY · Member since 2017 · 15 posts · 3 votes
    9y

    Keep the 50/50. But include an ongoing expense component to your agreement.

     For example, your friend agrees to pay you a fixed hourly rate of $XX /hr with a cap at 20 percent of monthly rent. By expensing your effort your getting some compensation, and your partner still gets to be the silent investor. If your friend went to a management company he would pay more and still get medicine service. 


    Maybe down the road he will become an active full partner and this will be a mute point.



    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @James Masotti pref at 8 t o 10 with IRR 20 plus...

    and if your buying SFR rentals 20 plus IRR over a 5 year hold is almost impossible.

    I don't see SFR's as a great investment vehicle for larger partnerships UNLESS the operator is buying at court house steps or other Highly distressed RE and they are coming into the product UNDER current market value by a nice chunk...

    And this takes a boat load of up front cash to pull off and a lot of expertise..

    Were the syndicators do well is with value add apartment type deals were rents move up .. distressed asset.. and crazy investors paying too much to get them Like whats happening today.. I don't see that in SFR for the mom and pop try ing to do this.. I know a few bigger players were this is working but they are working with hedge fund type money 5 to 20 million.. and have the powder and ability to scout the VERY best deals.. most folks simply can't do that .. if they are starting out. Not saying this person can't just generalizing.

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  • James MasottiPro Member
    Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
    9y
    Originally posted by @Jay Hinrichs:

    @James Masotti pref at 8 t o 10 with IRR 20 plus...

    and if your buying SFR rentals 20 plus IRR over a 5 year hold is almost impossible.

    I don't see SFR's as a great investment vehicle for larger partnerships UNLESS the operator is buying at court house steps or other Highly distressed RE and they are coming into the product UNDER current market value by a nice chunk...

    And this takes a boat load of up front cash to pull off and a lot of expertise..

    Were the syndicators do well is with value add apartment type deals were rents move up .. distressed asset.. and crazy investors paying too much to get them Like whats happening today.. I don't see that in SFR for the mom and pop try ing to do this.. I know a few bigger players were this is working but they are working with hedge fund type money 5 to 20 million.. and have the powder and ability to scout the VERY best deals.. most folks simply can't do that .. if they are starting out. Not saying this person can't just generalizing.

     Thanks for the great thoughtful response Jay! As always your insights are very valuable and appreciated. 

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