Thoughts on this type of partnership?

3 Replies

Hello,

I was recently at a local neighborhood get together and long story short met someone who is quite active in investing (15 plus years experience) and proposed a passive partnership that I could also learn from as he pitched it. All specifics havent been worked out but wanted to see if this type of "partnership" is heard of or what others thought.

Basically they have a home they are earning some good CoC on and what they would like to do is offer up my putting in most of their original investment costs (say for arguments sake 30K). In return I would get a passive check of 10% CoC on the property. They would keep the other CoC they are earning. (example...they are currently 18% CoC and by my providing 30K i get 10% they get the 8% as a "management fee" so to speak). I technically do not have to manage the property at all but they offered to have me shadow them to learn from this as well.

we also discussed my getting an equity stake in the property ...say 60% and they retain 40% equity should there be a sale down the road or any HELOC or refi etc.

also discussed were buy out terms should I want my initial cash out to move on etc.

anyone ever have deals like this? thoughts?

thanks,

Bo

I see you didn't get any replies to your earlier post on this proposal.  Lets try to get a discussion started.

As described, I don't like it.  Too complicated.  Too vague.  How do you get your money back?  When?  I don't like complicated.  Complicated is how people take advantage of each other.

Their cash on cash return is determined based on their cash flow and their investment.  They want you to put money in and you'll get some cash back.  There are two ways that normally works.  A loan or equity.

A loan is simpler. You loan them money, secured by the property, and get a monthly interest payment and, hopefully, your principal returned in some fashion. Personally, if I'm not in first position I'm not interested. Because you mention a refi or HELOC, I suspect the property is already mortgaged. So, thanks, but no thanks for me.

The alternative is equity.  A simple equity split would be for two people (or entities) to pool their money and buy a property for cash.  The split is determined by the money put in by each party.  It gets more complex when one party puts in something else, like labor or loans.  With labor (they're managing the property), what is the value of that labor?  How is it determined?  What if more work is needed than expected? Etc., etc., etc.  A loan is not the same as cash.  Cash is an asset.  A loan is both an asset (loan proceeds) and a liability (obligation to repay).  At best, a loan has zero net value.  Really, it has a negative value because of the cost and interest, and the impact of the borrower for any future plans.  So, if one partner contributes a loan, they really have provided something of value, just like a partner who contributes cash.  But what value?  A $100K loan and $100K in cash do not have the same value, if that loan is secured by the property.  If those two were used to buy a $200K property, and the bank foreclosed, the person contributing the loan would have their credit impacted, but would not be out any money.  The person who contributed the $100K in cash would lose a chunk of that cash.  So, even under the best of circumstances, equity partnerships are complex.  In a deal like this, even more so.

If I understand correctly, you're going to put in $30K.   All this "10% cash on cash on the property" is, frankly, incomprehensible.  What does that mean?   All you should care about is what return do you get on your money and when  and how do you get it back.  Do you get 10%, paid in monthly installments and the entire money back in five years?  Do you have a security interest in the property or is the loan unsecured?  Monthly installments and the money back someday?  Five year fully amortized loan at 10% interest?  What?  This is what you care about, not all this cash on cash mumbo-jumbo.

Jon,  thanks for the reply.  too confusing I agree.  I appreciate the heads up on this as I need some skin in the game as well :)

BTW all...  just spoke with investor...  what he was offering was to mentor me and also provide me some passive income for a term.  it was actually much more simple than I was making it out to be.

essentially....am i interested in parking some cash and in return getting a 10% passive return for x years....  at which point i would get my initial investment out.  not unlike a bond...  pretty straight forward...

i of course was taking it a bit further looking for some stake in the property ..LOL... 

so i guess the question to me is what passive return on my money would i be willing to take to park some cash outside stocks, bonds, and other investment vehicles....  

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