Private Investor Wants 50% for 0% work Advice

Real Estate Deal Analysis & Advice

Private Investor Wants 50% for 0% work Advice

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

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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Brandon Hicks
Investor · Avilla, IN · Member since 2013 · 796 posts · 769 votes
9y
Can you rehab and then sell the deal or wholesale it up front? The structure he is wanting is far more suitable for flipping. If you can do the deal that way then I say go for it and unless he changes his position I'd recommend you find another partner. And by "partner" I really mean a lender.
0 Reply
Patrick Ryan
Real Estate Agent · Minneapolis, MN · Member since 2016 · 52 posts · 37 votes
9y
Hire a management company, so that you don't have to bear the brunt of all management expenses. He seems unreasonable. If it's 50/50 on cash, it should be 50/50 on work. If he wants to do less work, and you are both fronting the same amount of cash, you need to be compensated for it. Maybe he could pay you $60/$80 per month per property to manage.
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Stewart VanValkenburg
Provo, UT · Member since 2016 · 55 posts · 15 votes
9y
Not a pro at the creative financing side but this is how I see it. If he has a bunch of money sitting around not doing much its because he's a cautious investor. He's scared you are going to lose his money. What can alleviate his fears? Some ideas;
1. Get a second opinion from a proven real estate investor about the likelihood of the deal going through. A pro with years of experience in this is more reassuring than someone who I'm guessing is a little new to the field.
2. Back up his loan with something. Maybe get him a lien on the deed of the property if you can write it in such a way that you can still get a mortgage on it later.
3. If he is not convinced a 10% return is worth the risk could you offer 12%. I don't know the budget details.
I don't know if any of these will work but I hope your deal goes well.

0 Reply
Brent Coombs
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
9y
@Tom R., if I had loads of cash lying around, how will you convince ME to give you a better deal than your friend? What history of deals can you show me? What network of value-for-money Contractors and Property Manager/s do you have on your team already? How do you source and vet your deals? Why would I agree to ANY particular percentage instead - if you're unproven?
How about practicing your answers right here - and your analysis of an example property deal?
(These are rhetorical questions, but you need to be able to answer ANY potential Investor, right?)...
0 Reply
Jay J.
Investor · East Haven, CT · Member since 2016 · 53 posts · 25 votes
9y
Simple, you add a "construction manage fee" which is 5% of hard cost in your rehab, an acquisition fee which is 1% of the total purchase price , an annual asset manage fee which is 1% of his invested capital and a 20 over 8 prompt structure, then this way you two can form a 50/50 GP/LP structure. But if I were you, I ask for 25/75 GP LP structure. Hope it helps This is all least equitable proposal to begin with, and this is what's used in commercial space every day. Otherwise I agree with Jay that your 100% cap from him and pay him 10% over 18 months that's non starter And his 50/50 with you doing all work is also non starter.
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Chris Martin
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
9y
This property appears to be intended as a rental. And clearly the original proposal was debt financing and the new proposal is a split equity arrangement. It also appears the property will be unleveraged. Looking at your 'deal' in your original post, neither proposition makes sense. Remarks like "He is holding strong on him doing NOTHING other than provide 50% of the upfront cash while wanting 50% of the assets..." is just laughable. As a lender, just from that perspective, I wouldn't deal with you.
Your original question was: "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."
So, I could make this work. If it were me and I was sitting in your buddies shoes, I'd form a multimember LLC. two 50/50 members with buyout clauses, etc., and operating agreement drafted by an attorney. I (meaning your buddy) would put in 50% CASH as a CAPITAL CONTRIBUTION. (This is NOT a syndication and there is no SEC filing! LOL!) So where is your capital? You get a first position loan, with your name as guarantor, for whatever you can get. Maybe 40%, maybe 50%, maybe 70%. The loan is through the LLC so you'll need to interface with a commercial bank, another private lender, or hard money lender, or family. Capital contributions from your lending activity in excess of acquisition costs (if any) become working capital. You should have enough to close the deal. Loan is in the LLC name, with your personal guarantee, not your buddy's.
Rules of OA: Two signatures for any future distributions, quarterly draws, 50/50 of net income (rent less ALL expenses), third party manager, etc. Note that you get the benefit of your buddy'd funds assisting in paying for your mortgage. In my world, I'd negotiate my capital split as 60/40 or better... and allow you to have first rights to buy me out at the average of two appraisals, per the OA. So P/L at 50/50, C at 60/40 on the K-1, with balanace of your loan liability coming from your capital portion.
Unless you are a licensed contractor, all work is permitted (permits 'pulled') and trades outsourced to licensed professionals. Your contribution(s) of 'project management' is part of the non-cash LLC contribution. Milestones, deadlines, failure to perform clauses, etc., are detailed in the OA.
My 2 cents.
4 Reply
Matthew T.
Investor · Springfield, MA · Member since 2010 · 277 posts · 84 votes
9y
@Tom R. What is your experience? 50/50 is not horrible. When I first started I brought in an investor and they took 75%. I had no experience and they were willing to take a chance on me. Now when I bring an investor in I typically give them 35-40% for fronting the capital.
2 Reply
Account Closed
Investor · Burleson, TX · Member since 2016 · 54 posts · 13 votes
9y
Tom Reid Tom why don't you budget for a property management expense (5-8% of rent) and if YOU are managing the property then you get that money. All cash flow after that is split 50/50 normally. If you have to outsource management later then it's an easier convo because it's in the budget. If he wants to manage it he can take the money. My $0.02
0 Reply
David Luetkemeyer
Investor · Stillwater, OK · Member since 2016 · 36 posts · 17 votes
9y
Tom, The way I understand it the investor is asking you to put up 50% of the money and all of the work. I am in investor and would love for somebody to do this for me. If I could find somebody to do all of the work and put up half the money I would take that deal all day. My question is if you have 50% down why wouldn't you get conventional financing? They normally only require 20% down and you get to keep 100% of the profits. Just my thoughts.
0 Reply
Diane G.
CA · Member since 2016 · 1k+ posts · 1k+ votes
9y
The single best comment came from @Janina Farr
"There are plenty private money lenders and Hard money lenders that will work with you for way less. Even being new".... Lol
0 Reply
Jon Graham
Property Manager · St. John, IN · Member since 2017 · 67 posts · 30 votes
9y
Doesn't seem like a good deal if he's only putting half the money down. Maybe if he was financing the entire deal, then it would make sense to split the profits. You take half for the work and he takes half for the investment.

HML will give you a much better rate with less out of pocket money. Some give the option to refinance at the end into a long term deal as well.
0 Reply
Ron Szmik
Real Estate Agent · Brecksville, OH · Member since 2011 · 166 posts · 75 votes
9y
Agree with @James Wise and do whatever it takes to get the first deal done fair or unfair......and move onto the next one.
"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."
1 Reply
Carlos Gonzalez
Investor · Phoenix, AZ · Member since 2015 · 346 posts · 170 votes
9y
I wouldn't do it. The guy is giving you the water and expects you to take care of the tree and all the care-taking that comes with it and he gets half of the fruits, no way. Take your business somewhere else. I would do it if I was 20 years old to learn as I go but you seem like you've been doing this for a while.
0 Reply
Tom R.
OP
Specialist · Cypress, TX · Member since 2017 · 23 posts · 13 votes
9y
THANK YOU - to everyone who has taken the time to read and respond to my question.
I really appreciate all the comments, whether negative, critical, positive or indifferent I am grateful that there is such an insightful group here on BP.
I've gathered some great info from this thread and am positive I can put together some numbers that make sense for both of us to knock this deal down.
Thanks again!
1 Reply
Jonathan Lake
Investor · New York City, NY · Member since 2016 · 49 posts · 10 votes
9y
@Tom R. Take the deal.
1. You need a deal to build credibility to set you up for your next one
2. You don't have the ability to fully fund and/or finance your own deal so you are at the mercy of an investor
3. Your friend is "willing" to fund at least a portion of it (this is more than others would be willing to give you since you lack experience and/or your own funding)
4. 50% of any deal is better than 100% of No Deal
5. Karma is King
0 Reply
Carlos Gonzalez
Investor · Phoenix, AZ · Member since 2015 · 346 posts · 170 votes
9y
Jay Hinrichs You are a very well knowledgeable man Mr Jay, you remind me of Andrew Carnegie with the mentality which you shine upon your posts and what you have done during your past. I want to be like you, anybody who comes across you should consider themselves lucky. Looking forwards to reading your posts and learning from you. If you come down to phoenix I want to meet you and learn personally from you. Carlos
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Jon Graham for 18 to 24 months HML is not the way to go at all. first off this person would need real money down.. and his intensions are to use OPM as equity...
HML on buy and hold will result in little to no cash flow unless your getting a smoking deal.
and at the end of the day you really end up in far worse position since the asset has not really appreciated and you have paid 20% apr for your funds instead of 10% or something like that.
Nope HML is not the answer here ... OP is going down the right track just needs to tweak it some .. respect the money for what it allows him then.. go do it.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Carlos Gonzalez Hey every one that was a paid advertisement.
Seriously, Carlos very kind of you to say.. just one mans opinion that's all any of these posts are
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1 Reply
Mark Holencik
Investor · Coplay, PA · Member since 2015 · 404 posts · 315 votes
9y
This is the way I structured the partnership. That is what you are looking for because you want all his money, not just one deal.
I formed an LLC with a 50/50 partnership. He brings the money. I do all the leg work. He holds the mortgage on the property's. The LLC gives him 6-8% interest. He gets 50% of the equity and income.
He makes the most money on each deal. He has the cash. Cash is King.
You do not have any hoops to jump through for his money. With anyone else you are going to have to prove you are worthy every deal. That in itself is very time consuming. He is saving you a lot of time and frustration. Give him the lions share.
When he runs out of money start to refinance them, Then you start using his money again. It is easier to do deals with him them with any other lender.
2 Reply
Zachary R.
Emeryville, CA · Member since 2016 · 8 posts · 0 votes
9y
I see a lot of you describing bringing 50% as "all the money" which is weird since it's quite literally half the money. Taking this deal seams desperate. 65 / 35 would be more in balance.
0 Reply
Mark Fedorov
Allentown, PA · Member since 2014 · 264 posts · 120 votes
9y
@Ben Shaikh has a good idea, you get paid to the management effort (I would suggest a simple % of rent roll to manage it + T&M for maintenance), and the profits are 50/50. Wrap the whole thing up in an LLC and you are fine... just make sure that you document EXACTLY how this LLC will dissolve, and what will happen if one partner wants to get out... The best JV's have e plan for when the Partners want to break up.
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Chris Martin
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
9y
@Mark Holencik you are a smart dawg. Let's summarize your post:
This is the way I structured the partnership.
LLC with a 50/50 partnership.
He brings the money.
He holds the mortgage on the property's [sic]
The LLC gives him 6-8% interest.
He gets 50% of the equity and income.
So for example, Buy a house for $100K. Partner puts down $25K, takes $75K mortgage.
Let's say house sells down the raod and clears $110K after commission and cost of sale. Pay off the mortgage (~$75K) and 50/50 partners get the "profit". $17.5K for you and $17.5K for partner.
What a deal! Partner puts in $25K cash, gets $17.5K out as "profit" after house appreciates! That's the payout for taking all the financial risk! Just make sure you keep telling him that you "Give him the lions share."
0 Reply
Adam Christopher Zaleski
Investor · Pueblo West, CO · Member since 2014 · 310 posts · 213 votes
9y
If you are flipping the property, I think it's fair for the investor to get 50%. I think it's somewhat of an industry standard. I haven't personally done it. However, many of my younger friends did this in their 20's when they didn't have any money and 50% was the standard. However, this was 10-15 years ago. Maybe lending is different now.
The investor puts up all the cash. The flipper does all the work. When the house sells, they split the profits or losses (50/50).
If you are talking about doing a buy and hold and the investor doesn't want to do any management activities, then you get a property manager at 10% of rent. If you want to manage yourself, maybe you could talk the investor into letting you keep the 10% of rent management fee for yourself. That seems fair.
0 Reply
Mark Holencik
Investor · Coplay, PA · Member since 2015 · 404 posts · 315 votes
9y
Originally posted by @Chris Martin:

@Mark Holencik you are a smart dawg. Let's summarize your post:
This is the way I structured the partnership.
LLC with a 50/50 partnership.
He brings the money.
He holds the mortgage on the property's [sic]
The LLC gives him 6-8% interest.
He gets 50% of the equity and income.
So for example, Buy a house for $100K. Partner puts down $25K, takes $75K mortgage.
Let's say house sells down the raod and clears $110K after commission and cost of sale. Pay off the mortgage (~$75K) and 50/50 partners get the "profit". $17.5K for you and $17.5K for partner.
What a deal! Partner puts in $25K cash, gets $17.5K out as "profit" after house appreciates! That's the payout for taking all the financial risk! Just make sure you keep telling him that you "Give him the lions share."
Your response has a few flaws. First we are talking about a buy and hold relationship.
Second, your math also has a major flaw. If you did sell the house without collecting any rent. There would be $10,000 profit. The split would be $5,000 each. That would give him a 20% on his money, plus the interest and principle payments till it sold.
These are not exact figures because the principal would be lower then $75,000.
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Hunter Letchman
Investor · Emerald Coast, FL · Member since 2013 · 45 posts · 11 votes
9y
I'm not saying this is a "bad" deal per se, it sounds like he wants to get into this type investing and doesn't want to be responsible for any losses. If he wants to be a silent partner then you should get a larger percentage of the ownership, cash flow, etc. there should be something more in this than a 50/50 split because your time is valuable. There are plenty of lenders out there that you can work with who will give you more favorable terms. As others have said, if he just wants to learn and there will be future deals at much more favorable terms to you, then maybe consider it but I would definitely structure this more to your advantage if you are doing all the work.
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