STR - Money Partner, how would you structure the deal?

Question

Situation:  I'm a first time STR buyer.  This would be my first RE investment.  I have a person who will pay the down payment on an STR.  Goal:  To own the property and exit the money partner from the deal once they've received their ROI.  Questions:

• Do money partners typically leave the deal once they receive a certain ROI?
• If not, do they typically remain partners in the investment?
• How would you structure deals like this?  I'm guessing this person will want to keep doing deals so long as their money is secure and they are getting the ROI they are looking for?
• Regarding paying them back, do you pay them after you set aside taxes, CapEx, Cash Reserves, and Revenue(to pay mortgage, cleaning, other expenses, etc.)

Thank you for your help.

JM

John Underwood · Answer

Have your money partner hold a second mortgage. That way when you pay him off the 2nd mortgage and he goes away.

John Underwood · Answer

It can be setup any way that you and investor agree upon.

Great idea @John

David Bond · Answer

We looked at doing a STR deal with an investor, using their money as a down payment. What we found is that Fannie/Freddie won't let you use the borrowed down payment money to purchase the home, so we would have had to do an in-house loan with a slightly higher interest rate and a balloon. We could have done this, and then once we paid the investor back in full, refinanced into a Fannie/Freddie loan.

We could have done a Fannie/Freddie right away, but would have had to have made a joint purchase with our investor, and the bank would have required him to be on the deed. He would also have had to submit his finances to the bank for review. A refi would have been more complicated too, as we would have had to redo the deed to get him removed.

In the end we were able to do the deal without an investor, but we learned a bit along the way. Hope that helps.

Kenneth Garrett · Answer

@JM M.

You can structure your agreement anyway you want.  That’s the beauty of private investors.  As far as what’s typical, there are basically two types of money partners; equity partners and debt investors and of course you can combine them provided you all agree.

A debt investor receives an interest rate of there money.  You agree to a percentage interest rate and a time period to pay them their principle and interest.  On a STR depending on how large the down payment is you might be able to pay them back in a year or two.

An equity investor stays in the deal and you share in profits and losses on a percentage basis depending on your agreement.

You can arrange the payback after all expenses which can include capex and reserves.  That’s how I would arrange it.  You might only need a few months to build up reserves.

Josh M. · Answer

Thank you @David Bond, I appreciate you sharing your experience with this.  This helps.  I intend to speak to a mortgage person this week.  If you have any you would recommend me looking into, I would appreciate it.  Thanks again for your time.  I hope you have a great week.

Josh M. · Answer

Great idea @John Underwood.  Thank you!  Would that typically be setup as an APR, so if it takes x amount of time to pay them off, I just pay them the agreed upon rate?

Josh M. · Answer

Thanks @Kenneth Garrett!  I appreciate your patience with a beginner.  You did a great job answering my questions.  I hope you have a great day!

Josh M. · Answer

No worries @Luke Carl.  I've known the guy for a long time, we are pretty close and he trusts me.  I also have various experience in renovation, construction, and in the RE industry.You are correct, I have to start somewhere.   I want to get my ducks in a row and understand things before just jumping in.  I want to be respectful of him and all involved so I'm trying to do my due diligence and start this business by being professional and knowing as much as I can.   Thanks for all of your help.

Luke Carl · Answer

Forgive me for saying so but if you can’t answer these questions why would someone be interested in giving you their money?

That being said I APPLAUD YOU! you’ve got to start somewhere!

STR - Money Partner, how would you structure the deal?

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