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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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    9y

    @Mark Holencik so, yes, the $25K in this example is distributed first in your example. I believe the 6-8% preferred distributions don't affect capital accounts (a CPA can correct me if not.)

    I was talking about capital contributions and you changed the topic to P/L (Profit and Loss). Regarding , Part II, Line J under capital %, if P/L is 50/50, then any rental income (or loss) in a tax year is equally divided. Depreciation expense will follow P/L too, I believe.

    But one partner putting in $25,000 and the other putting in 0% is not 50/50 capital contribution. What you describe in your response is, upon an asset sale and distribution, the partner putting in the $25K gets preferential distribution. These scenarios, for sure, need to be identified in the Operating Agreement.

    I'm not an accountant. An accountant (@Steven Hamilton II ) can chime in, but I'm just going from the IRS instructions regarding distributions at the end of the partnership, when you ultimately sell your Long Term Investment property. Under Part II, Line J:

    The ending percentage share shown on the Capital line is the portion of the capital you would receive if the partnership was liquidated at the end of its tax year by the distribution of undivided interests in the partnership's assets and liabilities.

    Mark, I think we  are more or less on the same page. LTCG and Depreciation recapture will show up on the K-1 according to the Operating Agreement or the P/L/C percentages in Part II, Line J... can't recall where.

    0Reply
  • Joseph Calvano
    Plano, TX · Member since 2017 · 5 posts · 1 vote
    9y

    @Account Closed, but great dialogue !

    1Reply
  • Kirk H.
    Investor · Kansas City, MO · Member since 2016 · 56 posts · 9 votes
    9y

       @Jay Hinrichs

    I am surprised to hear you say that there is no skill to buying renting and managing rental property. Given the amount of bad reviews a lot of PM's get I would think you would realize there is skill, knowledge and hard work involved in pulling off profitable PM

    0Reply
  • Derrick Aragon
    Investor · Portland, OR · Member since 2016 · 213 posts · 60 votes
    9y

    @Tom Reid I don't have time to read all these comments. This may or may not been said...

    Where you went wrong is you didn't tell the forum what you want.. 

    And what you can financially contribute % of the deal.

    If you are going for 100% financing from this one guy, and it sounds like you have none or small amount to invest.

    No money to invest ie have this guy do 100% of the deal:

    Give them 100% of the cash flow and give them all of the available capital capable during the ref point. 

    100%= 100k buy + 100k remodel and to give him your first example 10%roi 220k back but if it appraisal is $300k 80% LTV refinance you can give him $230.. Which would be 15% roi and whatever cash flow so maybe total irr of 20-25%.

    To pay for your work add project management fee to pay for the management of construction and all that things you mentioned.

    Sounds like your long term goal is acquiring assets so don't be short sided. 

    Other option is file the other half of the 50% up with another investor. 

    Something to think of if it is a long term hold how are you going to pull off the perm financing on your own. Keep them part of the long term plan with equity you might need a sponsor. You do all the work get PM fee or a acquisition fee 1-3% (typical syndication) give them 100% of cash flow and 10% preffered and 20% of back end long term play. Get him to committee to long term capital commitment. You do this and if you meet expectations he keeps his investment in the partnership to do it again. Execute again.. Then scale up if you can.. 

    Honestly it seems like you have not worked out a relationship partnership with the person and they are getting hyper focused on the investment not the partnership.

    0Reply
  • Mark Holencik
    Investor · Coplay, PA · Member since 2015 · 404 posts · 315 votes
    9y
    Originally posted by @Chris Martin:

    @Mark Holencik so, yes, the $25K in this example is distributed first in your example. I believe the 6-8% preferred distributions don't affect capital accounts (a CPA can correct me if not.)

    I was talking about capital contributions and you changed the topic to P/L (Profit and Loss). Regarding , Part II, Line J under capital %, if P/L is 50/50, then any rental income (or loss) in a tax year is equally divided. Depreciation expense will follow P/L too, I believe.

    But one partner putting in $25,000 and the other putting in 0% is not 50/50 capital contribution. What you describe in your response is, upon an asset sale and distribution, the partner putting in the $25K gets preferential distribution. These scenarios, for sure, need to be identified in the Operating Agreement.

    I'm not an accountant. An accountant (@Steven Hamilton II ) can chime in, but I'm just going from the IRS instructions regarding distributions at the end of the partnership, when you ultimately sell your Long Term Investment property. Under Part II, Line J:

    The ending percentage share shown on the Capital line is the portion of the capital you would receive if the partnership was liquidated at the end of its tax year by the distribution of undivided interests in the partnership's assets and liabilities.

    Mark, I think we  are more or less on the same page. LTCG and Depreciation recapture will show up on the K-1 according to the Operating Agreement or the P/L/C percentages in Part II, Line J... can't recall where.

     We are not on the same page .

    You need to read what I have written without your experience blinding you. My partner does not put any money into the LLC to purchase a property. He gives the LLC a mortgage for every property we purchase. We were at the notary this morning doing the paperwork for a mortgage on a property we are closing on Wednesday. He will get 8% on this mortgage. He gets all his money back through mortgage payments. Not through the sale of the property.

    At any time he can sell his share in the LLC and get his share of the equity and still get the mortgage payments.

    He gets the Lions share of every deal.

    0Reply
  • Ed B.
    Real Estate Investor · Sacramento, CA · Member since 2010 · 298 posts · 103 votes
    9y

    On my first partnership, my partner put up all the money and got half the profits. I thought that was too much and still do, since I was the one who found the deal and managed it, which is far more valuable than simply putting up the money. You could probably find an investor to put up all the dough for 25% interest, and still get a very good APR return. Finding the opporunity is at least half the battle. I'd never give anyone 50% even if he puts up all the money.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y
    Originally posted by @Kirk H.:

       @Jay Hinrichs

    I am surprised to hear you say that there is no skill to buying renting and managing rental property. Given the amount of bad reviews a lot of PM's get I would think you would realize there is skill, knowledge and hard work involved in pulling off profitable PM

    I reckon Jay just means that so long as @Tom Reid has a good network of referrers, it's NOT hard work to find a "profitable PM", because it's not Tom who needs the PM skills! Cheers...

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

    @Brent Coombs  my comment on PM @Kirk H.  was predicated on the operator self managing and no I don't think its a very difficult thing to do is buy a rental and stick a tenant in it.. I simply don't

    Obviously there needs to me industry standards for tenant placement .. but other than that I see no special skill in this.

    Now if you run a PM company with a bunch of C and D class then yes Katy bar the door your in for a lot of work. 

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    0Reply
  • Jamie Parker
    Real Estate Investor · Memphis, TN · Member since 2016 · 436 posts · 142 votes
    9y
    Tom Reid I would pose the question, is 18 months the earliest you can cash out? If you have all the ducks lined up and "you investor" is the only hold up;then I can understand your frustration. If there is still time before day 1 of this partnership, I would check around to find a. lender that can cash you out in say 1 year vice 18 months. Seasoning requirements could vary between institutions. The reason I bring this up is Jay Hinrichs Brings up a great point, about simply getting in the game. If this 50/50 split is this much of a issue, is it about the money or the fact that you "investor" changed up? Because the investor is putting up 100% I think you would want to take note because most times you can only get 65-90 LTV on purchase/rehab cost. This investor is a really valuable person to maintain a relationship with in the future of you start to take down more projects or bigger projects. Don't focus on the problem, use some of the solutions pointed out, sliding profit split, carve in Property management fee for yourself, something. Just get in the game, since you starting out I would hate for you to miss out on cash flow+ deal with a solid exit strategy right out the gate.
    1Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    9y
    No experienced investor would do a deal like yours for 10%. I can get 12% all day and night with much less risk from funds like Jay Hinrichs talks about. On Private lending deals I need at leas 15 to 18% and on SFR rentals at least 20% to make it worth the effort.
    1Reply
  • Kevin Siedlecki
    Investor · Madison, CT · Member since 2014 · 710 posts · 458 votes
    9y

    @Tom R. - The biggest question is: does the partner add value for you? Does he have experience that you can draw from when things come up? If you're running the day-to-day, but he has more experience and will get involved when you run into inevitable problems, then giving 50% is not bad. As they say on the podcast, 50% of a good investment is better than 100% of no investment. 

    Either way, you could probably remedy what you see as unfairness by taking a management fee as part of your compensation. Take 8-10% gross rent yourself before the 50/50 split. 

    0Reply
  • Mark Holencik
    Investor · Coplay, PA · Member since 2015 · 404 posts · 315 votes
    9y
    Originally posted by @Jay Hinrichs:

    @Brent Coombs  my comment on PM @Kirk H.  was predicated on the operator self managing and no I don't think its a very difficult thing to do is buy a rental and stick a tenant in it.. I simply don't

    Obviously there needs to me industry standards for tenant placement .. but other than that I see no special skill in this.

    Now if you run a PM company with a bunch of C and D class then yes Katy bar the door your in for a lot of work. 

    I agree with Jay. It is not a job that I like or want to do. So I do not do it. But that does not mean it is a high skill job. The person who actually places the tenant is paid around $15 an hour.  That is what that skill is worth. 

    The person who can save up the money you need to do a deal is priceless.  

    0Reply
  • Robert Shaw
    Investor · Madison, NJ · Member since 2016 · 57 posts · 30 votes
    9y

    I have over 20 years in private equity and venture capital. Sponsors have a typical startup mentality. They fall in love with their deals and think it's the best thing since sliced bread, and consequently, their short-sightedness led to their demise. In PE, we constantly do post-mortums on deals we've passed, and track their performance years later. It's our experience that greedy founders don't the next round of funding because the valuation was too high in the first round. 

    It's the same in JV and syndication RE investing. If you treat each deal like a lottery ticket, you will lose. What's important is to build relationships because when you need money for a project and can't raise capital, you're losing money.

    There are so many deal finders on BP willing to work for free and get their foot in the door. There are even more experienced sponsors on crowdsourced platforms with 75/25 or better deals. Why would an investor take a chance on you? Do you have 30 years of development reputation?

    So alas, you think you can get away with 50/50 or a debt deal because you see mom and pop investors out money into 12-20% IRR deals and you think heck I can do that. What you fail to realize is there are varying degrees of risks investors are willing to pay for, depending on their own interpretations and return expectations.

    I can tell you that just because there are investors out there willing to settle for a low return on a core+ product, it doesn't mean that will continue to be the case, or that they will invest in a less experienced sponsor. Even if they do the first time, they will unlikely do so the next.

    2Reply
  • Robert Shaw
    Investor · Madison, NJ · Member since 2016 · 57 posts · 30 votes
    9y

    I'm not aware of any sponsors who has ever said they have enough investors. Even billion-dollar players like Encore have full-time staff raising mom and pop money to invest side-by-side with insurance company money. They will do 8% pref plus 65/35, deliver 20-30% IRR, and have a consistent track record.

    If I was starting out, I would personally do 80/20 or better deals depending on size just to build a track record.

    With more access professional sponsors and more investor awareness, I see money flowing to the more seasoned sponsors who offer superior returns. Money goes to where it's best treated. 

    0Reply
  • Christopher Winkler
    Specialist · Dallas, TX · Member since 2014 · 900 posts · 392 votes
    9y

    Why don't you try investor funds 100% of the purchase & rehab, you find the deal, hire all the subs, and supervise it. When done, filp and split profits. Why do you want to hold it for 18 months? You are doing a BRRR with OPM?

    I have a couple investors who have approached me to do this and I am seeking something in DFW that we can work it on, though they have to be at 70% of ARV less repairs & no wholesaler here offers that, so I am doing my own marketing for those deals. I'll take 50% of the profit all day. Let us know how that plays out...

    0Reply
  • Justin Jocewicz
    Investor · Royal Palm Beach, FL · Member since 2013 · 162 posts · 67 votes
    9y

    This thread is interesting.  The value I bring to the table is 11 years of landlording experience, 3 years of rehabbing experience and a portfolio loan with a local bank.  This year I would like to purchase as many buy & holds as possible.   By myself, that will be one a quarter or at the very best one every two months.  Hence the reason looking for a silent partner.  What say ye, the community, about the following proposal?

    Partner In
    30% downpayment

    Partner Out
    30% net rent monthly
    30% equity stake in real estate asset

    Me In
    Rest of acquisition cost (70% and closing costs)
    Rehab
    Rental
    Repair
    Reserves

    Me Out
    70% net rent monthly
    70% equity stake in real estate asset

    Partner receives check every month regardless of the status of the rental.

    0Reply
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