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
Difference (equity) 32k
1/2 debt 34k
1/2 equity 16k
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
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.
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