Private Investor Wants 50% for 0% work Advice

Steve B.

Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes

9y

His terms are actually better than your terms but they are both bad. Why would I finance your project for the same 10% return I could get from my local HML?

Diane G.

CA · Member since 2016 · 1k+ posts · 1k+ votes

9y

@Jay Hinrichs, @Steve B.

Soooo agree with you.... Between a potential 10% (with risk of up to -100%), and a safer 5% with a reputable company like Goldman Sacks, I will take 5% with GS in a heartbeat.......

For me to invest in a private individual, I need 50% equity in FIRST position....Short of that, here is the door... period...

Diane G.

CA · Member since 2016 · 1k+ posts · 1k+ votes

9y

If someone is putting up all the money, and you put in the work, you are in essence his employee.....

Do you go apply for a job, and tell the boss "by the way, after 18 months, this whole store is mine"... See who would hire you.... Lol

Jason V.

Investor · Rochester, NY · Member since 2016 · 477 posts · 426 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

The most important question in my mind is: what are you going to do for financing if you can't make a deal with your friend?

S. J. Gardner

Normal, IL · Member since 2017 · 20 posts · 4 votes

9y

Perhaps a conversation on perspective is in order. I'm imagining, of course, that the friend in question has limited to no experience in REI. That said, convey to him that, generally speaking, interest is the reward for lending while ownership & profit is the reward for working. You don't get to do one and get both. That's simply not how it works.

If you do decide to try and make this deal work, try negotiating a sizeable property management fee out of his 50%. Any absentee owner (which he wants to be here) would have to pay property management fees. Perhaps fees higher than market rate would be appropriate in this situation. If we're being creative, then that might work. . .

Aaron Z.

Investor · Virginia Beach, VA · Member since 2015 · 83 posts · 34 votes

9y

Tom Reid just my 2¢ after struggling with this from both your perspective and your friends perspective in my own RE dealings. Your offer isn't generous enough to attract capitol in large enough amounts for RE investing unless someone is doing you a favor - and family is about the only group that might do that. His offer swings the pendulum too far the other way since you have an established friendship and he doesn't want any involvement. I propose taking his offer and making the following changes: • 90/10 investment (he pays 90, you pay 10) -so you have some skin in the game. • Refi out mortgage in your name and guarantee a 25% return on his initial investment - take care of your investor. • Provide him 10% of gross rents for 3-5 years at which point the property becomes 100% yours. • Allow him NO management or ongoing responsibilities. • IE - I do property vetting, mgt of rehab, mgt property, mgt finances, mgt llc, etc. Make it clear that you want to do this long term with him and that this is just the beginning and that future deals would be more equal as you built up your own capitol from your share of each deal. But, find other sources of funding so that you can show him that you have options and are looking around, but that you would prefer to partner with him because it would be good for both of you. In short, sell him on your plan and make it worth his time to take the initial risks while you don't have experience managing rehabs, etc. once you have experience you are in a better position to make the case for more favorable terms for yourself. This is a lengthy response, but you asked for specifics and you have an existing friendship and are looking for a partnership where you each bring very different strengths to the table...

John Speener

Title Representative · Fairfax Station, VA · Member since 2017 · 3 posts · 2 votes

9y

You can find list of liquid capital investors that are going to charge anywhere from 6% to 12% on what's borrowed. I would put together a deal with another lender and give your friend the opportunity to beat it. Remember you have all the leverage, you have the property and the deal. He just has the cash, but fortunately he is not the only one with cash. Remember it's not like he is getting that kind of return from keeping it in his bank. If you want to get this under control show him the other competitive offers.

James Wise

Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes

9y

@Tom R. You can only structure what he is willing to pay you.

I think this deal you proposed below is to lopsided. I don't think you ad nearly enough value in that scenario to entice another investor. Which appears to be correct as he has changed the deal on you.

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. :)

This deal below that he proposed to you is lopsided as well. I think a 50/50 split of capital should mean you should be getting paid for the management of the property.

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.

So my opinion in a perfect world you to try to meet in the middle. 50/50 capital split but you earn a 10% management fee is how it would be fairly structured.

Thing is, it sounds like your chasing him down to get his capital into play. If you want to get a hold of it you may have to take some lumps and end up doing some deals that aren't fair. Deals that may very well be lopsided in his favor. I know I did some J/V deals in the past that I wouldn't do again in my current position but would not change the past as those deals got me to where I am today. Sometimes you have to give some concessions to get started and make a name for yourself. Once you have a name you can begin to turn the tables a bit.

5 Reply

James Wise

Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes

9y

For those that dislike wordy posts If I were to summarize my thoughts on this topic into a single quote I would say

"In the beginning of your career you shouldn't worry about what is fair. Just focus on what gets you where you wanna to go."

14 Reply

Daniel O.

Investor · Takoma Park, MD · Member since 2016 · 166 posts · 147 votes

9y

I'm with @Jay Hinrichs on this one. Any time you are trying to do a deal, it helps to step into the other guy's shoes and look at things from his perspective. And the reality is that your friend could probably do this deal without you, but you might not be able to do it without him. There are a couple of additional thoughts I'll share. 1) If your prospective partner is a friend, you both need to be careful not to let this affect your friendship. It is a lot easier to come up with money for a deal than it is to come up with good friends!

2) It might help for you both to look at what you are bringing to the table. Yes, he is bringing the cash. And that is easily quantified. But what you need is a way to quantify or value the part of the thing that you are bringing to the equation. One way to do this is to look at what it would cost for you to outsource that work. What would a property management company charge to manage it? 10% of rent plus a tenant finder fee? OK, that's part of your contribution. What would it cost to have someone else manage the rehab? Boom! Part of your contribution. Do the accounting? You get the idea. Will you be doing the rehab, or just managing it?

So, the deal might look something like this:

Purchase price + closing costs + project management costs + contractor costs + monthly management costs + monthly accounting costs + maintenance and repairs. You can assign a dollar value to each of those things. Some, like the purchase price, are money that has to come to the table to make this work. Others, such as your efforts at property management, are in-kind contributions that you can assign a monetary value to by seeing what they would cost on the open market.

Figure out how much each of you is contributing to the deal, whether in cash or cash-equivalent labor. Assign a dollar figure to the following:

His share of acquisition cost?

Your share of acquisition cost?

His share of rehab cost?

Your share of rehab cost?

Fair market value of his in-kind contributions?

Fair market value of your in-kind contributions?

Fair market value of your property management?

Now tally these up. Give the total a value of 100%. Look at his cash and in-kind contributions. What portion of that 100% is his? What portion is yours? Who is assuming the risk in this endeavor, and what is that worth. Remember, once you've spent your time, it is gone. That is not the case with the cash. But that cash is at risk until you refi and pay him off...so that he can put it at risk again. The fact that he is putting his cash at risk has to be worth some kind of premium.

Jay Hinrichs

Derek Carroll

Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes

9y

Everyone here has their opinion so make sure you're taking it as such and not as gospel. 10% return is excellent for lots of folks and is a good reason for many people to invest in a deal. Risk adjusted most investments are comparable. A 5% return with very little risk may be comparable to a 25% risky return after adjusting for risk premium. They each have their place and their audience. Doesn't mean one is categorically better or worse than the other. I see hundreds of millions of dollars of deals a year and every one is different. The loudest opinion doesn't mean it's the right one. Sometimes deal flow and active participation is worth a lot for someone who wants to remain truly passive and they Should be prepared to pay for that convenience or they can buy some public securities. All that said to your specific question if there is no way around the 50/50 split then I'd go along with it and charge a fee for all the services that you're providing. If I'm syndicating a deal you can bet that I'm being compensated for my time, efforts and expertise. You could charge an acquisition fee, asset management fee, property management fee, construction management fee etc. maybe your partner wants you to have equal skin in the game and if that's his preference so be it, just charge for the additional services that you are providing.

4 Reply

Derek Carroll

Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes

9y

Truth be told capital is a commodity so if you truly have a good deal then don't give it away just to partner to get it done. There will always be someone else who takes the other perspective and willingness to invest. You just have to do the work to find that person.

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Jay HinrichsBusiness Member

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

9y

@Derek Carroll I think this is a great thread as BP is dominated by those that are trying to launch first time ventures....

And of course all of our personal experiences are exactly alike,

When you talk about a syndication these are usually done with bigger dollars much more sophisticated sponsors ( were sponsor frankly is more important than the asset in many cases).

what I get from a lot of people is how do we get that first one launched.. and in deed family in friends is the most prevalent but when you start branching out there is a ton of competition for investor dollars as you know.. With some really great operators.. I know a few here on BP and others that I just know through the years...

My style has always been pay the money get launched and then grow on the relationships.. if you do that money is never an issue...

I see many on this site simply never get anywhere because they just can't let go of HEY I AM doing all the work and the money is lazy money and they should be happy to let me invest for them.

But lazy money did not get that way from being unsophisticated in the ways of making money.

if someone has 100k to invest means he or she made 140 to 150k pre tax to get that..

But this is a great thread as I said to talk about both sides of the issue.

A management fee in the above scenario would work fine and probably be fine. but if it was my first deal I would just do what it takes to get it in the door then fill up my experience bucket

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Hunter L.

Investor · McLean, VA · Member since 2013 · 53 posts · 18 votes

9y

There's nothing wrong with leaving some money on the table in the short-term to win over the long-term. Just my two cents....

Derek Carroll

Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes

9y

@Jay Hinrichs I tend to agree especially if this is someone's first deal. Just get it done and get some experience under your belt. There is always another deal out there...

Bob Derwin

Investor · Mountaintop, PA · Member since 2013 · 110 posts · 57 votes

9y

I say go for the 50-50 split to get started. Starting is more important than trying to ring every dollar out of a deal. My first two deals I found, negotiated, found bank financing, arranged/monitored rehab, and still manage myself (with by brother and sister as full business/equitypartners). Both were financed with commercial loans requiring 25% down plus rehab costs. Without their funds, I doubt I could have completed either deal. After 3 years of performing the management free of charge, it was decided that i would begin taking a 10% management fee. However, as a result of the first two deals, I now had 2 bankers who I have a proven track record with, and have since acquired 4 single family homes on my own. Good luck and try to find a way to make this deal work. The first one, is the most difficult.

Gordon Ludolph

Real Estate Investor · Kissimmee, FL · Member since 2016 · 2 posts · 0 votes

9y

Hmmm, I'm afraid I'm having trouble with your position on this.

A hard money lender in general would never lend 100% and they would be charging more than 10%. Many won't even talk to you, if you can't provide proof of having done at least one flip.

Many property managers would take care of the property including keeping it rented as well as dealing with evictions for 10% of rents generated, not potential rent, but the actual rent being generated each month.

A very successful investor I know had a similar business relationship, when he started doing real estate investing in the USA. However, he had experience in real estate, having done some flips already in Canada, where he resided.

His partner agreed to finance 100% as a silent partner for 50% of the business. They set up an LLC to conduct their business through.

If you have little prior experience then the financier is taking on much greater risk. You essentially have none, at least in dollar terms.

If your partner would agree to a 60/40 split in his favor on the initial property, then you should be thrilled. Once he's comfortable with the way the transactions are proceeding, (perhaps after a couple successful deals), then you could move to 50/50.

I would suggest that your time may be better spent analyzing and doing the deals than personally doing the rehab work or managing the properties. Leaving that to the pros should actually save you money in the end.

David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

9y

@Jay Hinrichs I agree with you. If the OP doesn't like the terms with the investor, then he should take down the deal himself with his own money. If he doesn't have his own money, he could try to renegotiate or find another investor, and even if he can in the meantime the deal may go bye-bye so he may be left with 100% of nothin'. Greedy or cheap will get you killed in this business ...

Maxwell Lee

Real Estate Investor · Miami, FL · Member since 2013 · 474 posts · 214 votes

9y

I skipped over half the comments so apologies if I'm repeating somebody else.

I think the 50/50 proposal is not fair to you, but at the same time if you cannot find another investor to work with this may be all you've got. My counterproposal would be to pay yourself some kind of management fee for the work you are doing. I can understand him wanting to control an equal amount of the asset that he's paying for, but maybe you can just compensate yourself a bit for the work you are doing. That said, it's really not sustainable for future deals if you don't have the capital to continue. Unless he is willing to fund 100% of future deals and, again, pay you a management fee, whether in actual cash or with a small share of equity. One other option if he's amenable is a preferred return and then a profit split. If you go 50/50 with him, you both share the first whatever you decide, say 7-8% profit, and then any profits above that hurdle get split 50/50. Therefore you, as a sponsor, get compensated with 50% of profits above 8%.

Just my 2 cents, anyway good luck!

David Avila

Hanford, CA · Member since 2017 · 10 posts · 3 votes

9y

I'm with Jay Hinrichs . As long as you have the 50% agree to the deal.. with a caveat. 50-50 this deal 60-40 next deal ..all the way to 90-10 and then by that time he should have enough belief in you that it will be a successful partnership that he will be willing and happy with the 90-10 or even the 100-0. Hopefully by then you'll have enough to fund one 100% on your own.

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Will BarnardPro Member

Moderator

Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes

9y

Originally posted by @James Wise:

@Tom R. You can only structure what he is willing to pay you.

I think this deal you proposed below is to lopsided. I don't think you ad nearly enough value in that scenario to entice another investor. Which appears to be correct as he has changed the deal on you.

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. :)

This deal below that he proposed to you is lopsided as well. I think a 50/50 split of capital should mean you should be getting paid for the management of the property.

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.

So my opinion in a perfect world you to try to meet in the middle. 50/50 capital split but you earn a 10% management fee is how it would be fairly structured.

Thing is, it sounds like your chasing him down to get his capital into play. If you want to get a hold of it you may have to take some lumps and end up doing some deals that aren't fair. Deals that may very well be lopsided in his favor. I know I did some J/V deals in the past that I wouldn't do again in my current position but would not change the past as those deals got me to where I am today. Sometimes you have to give some concessions to get started and make a name for yourself. Once you have a name you can begin to turn the tables a bit.

While reading the OG question and the following responses, I was awaiting to read a response that really captured both sides and included the specific details rather than just a pile of opinions. I didn't see one until this post which, in my opinion, realky captured the original poster's question and answers it specifically from both proposals that were made. I won't regurtitate this as that would be redundant. Shortly after this post, @Jay Hinrichs hit on some additional great points and I agree.

So I think both proposals are lopsided and you need to also consider what you are willing to give up to get this ball rolling. If you want more detailed advice on this, it would also be helpful in knowing what experience you do have and what your potential partner had. You did state he is nervous about RE investing so I would question how and why that is the case.

Lastly, if your desire here is to utilize this great wealth of your friend to spring you both forward financially, (and I am guessing the amounts you are talking about here are in the $1M plus range) I would question why you would want to use single family home rentals as the vehicle. I would suggest you compare that option with others such as multi family apartments, other commercial RE assets, notes, flipping, a combination of several of these, etc.

Shawn AckermanPro Member

Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes

9y

@Tom R. There's bigger picture i.e. future deals. Although you cannot count on the future deals that you may do with this investor, if, as you side the first deal works then there is a good possibility that you can do more deals on more favorable terms (I'd take those odds). You may just have to take this on the chin and share the financial love in return for the capital to get the deal done. Do you have another private money person you can split your 50% share with? Time to get creative my friend. Best of luck. Persist and you will WIN.

Chris WaltersPro Member

Montreal, Québec · Member since 2016 · 133 posts · 19 votes

9y

Tom Reid if your business plan is solid, there are hard money lenders who will lend you the money. Men lie women lie, but numbers do not! Just make sure everything makes sense and all figures are accurate. There are two options here: Either your friend is ******** his pants and find it is too risky, therefore he's upping the ante, or the dealls seems lucrative to him and he wants a bigger piece of the pie. I will leave that up to you to figure out. One way or another, if it is really a deal and not a dream, you will make it work. An experienced hard money lender knows that if you do not reimburse within the agreed time period, not only will there be additional % penalties, but he or she can actually sue you and recover the property for themselves. 1st question you must ask yourself is "is this really a deal i found". If the property cashflows and you can eventually pay back the investor before the time period has expired, then try to find another person. As some said, the fact that you have $0 in the deal is somewhat of a disadvantage because you have nothing to lose and from a lender's perspective this can be a down side. Don't think he's the only person out there. Do your homework and hunt down other investors who might be interested to offer the money at 10%. You can have a clause where for example the money is to be paid back in 18months with 10% interest rate and after that you get penalized an extra 5%. You have to be creative, but one thing is for sure, you better be sure about the figures and not run out of money, because your luck will quickly run out too. I hope everything works out for you. Search for new investors as if your life depends on it! Don't give up

Janina Farr

Investor · Chicago, IL · Member since 2016 · 33 posts · 13 votes

9y

There are plenty private money lenders and Hard money lenders that will work with you for way less. Even being new. Do hard Money works with new investors. I say pull the deal off by yourself since he doesn't want to do anything anyway and I bet he will be coming to you versus you needing him. Show him your worth. That's what I would do. He's being greedy. Finding a partner isn't hard. Just gotta put the word out.