Convoluted Math Help?

3 Replies

I believe I need some help with my math.  Here is the situation:

I have a property that I have purchased and rehabbed.  I'm all-in at about $90k (I ran into contractor issues that ran the rehab higher than anticipated).  The property appraised for $100k a few months ago and I owe $80k on a bank loan.  

Here is where I need help.  I have a partner in other properties that expressed interest in this property.  The math that I came up with is the property appraised for $100k.  If he wants to be a 50/50 partner in the property, he would pay me $50k.  I would quit-claim the property from my company's name to "our" company's name.  At the same time, I would pay down the existing mortgage to $68k for better cash flow and refinance the property into our company's name as well (all of which has been approved with our bank, title company and CPA).  The by-laws of our company state we are 50/50 partners on everything, including debts.

He has different math: His concern is a $50k investment for $16k equity is a gap of $34k on his side. That would imply a $68k total gap over appraisal at $100k at 50/50 ownership.

To be honest, I'm not sure who's math is correct.  Help me BP! :-)

Thanks in advance!

@Rob Scarborough   I would think about it in steps.  You said you have $20,000 in equity and a mortgage of $80,000.  If you want to do the deal without making a profit in the transaction that would mean... he would pay you $10,000 and sign on to a mortgage for $80,000.

You then said you wanted to reduce the leverage down to $68,000.  You would split that $12,000 50/50.  So he would need to pay $16,000 and you would get $4000 ($10,000 for the equity minus the $6,000) at the closing.

Of course you are trying to do a refinance.  That will not be free.  If the total amount of the loan has to stay at $68,000 then expect to pay more at closing for all the costs of the new loan.

I haven't a clue where the $16K and $34K numbers come from. 

However he is buying not 50% of the property,(the bank "owns a significant portion).  He is buying 50% of the equity.

Of course what you decide to charge for that equity is negotiable. If the property will generate 305 cash on cash return on 1/2 of the equity you can charge more for it. I the property will only generate 1 or 2% return, I am not going to pay you much for 1/2 of it. 


Maybe look at it this way... if it's all cash (no loan)... then a 50% buy in would be 50k. What you are after is a combination of debt and equity to TOTAL 50K. If he is an equal partner in debt AND equity (as stated) here is what you get.

Property value = 100k

Debt 68k

Difference (equity) 32k

1/2 debt 34k

1/2 equity  16k

Total 50k

Ergo: he pays you 16k and assumes debt of 34k for a total of 50k or 50% of the property. 

Or as it sits currently 

Value 100k

Debt 80k

Difference (equity ) 20k

1/2 of equity 10k

1/2 debt 40k

Debt pay down (equity  increase ) 80k - 68k =12k

1/2 debt pay down (equity  increase ) = 6k

So, 10k equity + 6k debt pay down (equity increase ) is 16k with the assumption of half the 68k debt or 34k. This is, again, 50k or 50%of the value of the property. 

To sum it up. Your partner owes you 16k cash for the buy in,  and should assume 34k in debt. 

Hope that helps. 

Good luck! 


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