What actually changes once you bring in a partner or private money for the first time

Question

From my experience, I've used both notes and shared equity, and it really comes down to the opportunity and your own risk profile. Private money gives you more control but tends to cost more, while equity is cheaper upfront but means less control and less upside for you. Would you rather give up equity for a partner's cash, or pay a private lender's rate and keep full control?

Don Konipol · Answer

Since we both provide private mortgage loans on commercial property, and will provide equity capital (for a controlling interest) I’d say that the property owner almost never wants to give up equity - but in many cases they should. About half the deals we see are ones where there’s insufficient equity and too much debt. As a result there’s a negative cash flow that’s accentuated by the fact that the borrower is paying higher interest and costs because there’s insufficient equity to secure institutional (lower cost) financing.

As an example of an equity deal was a retail center that the owner was paying 13% interest on a loan, couldn’t attract new tenants because he couldn’t afford the landlord buildouts, and owed $200,000 immediately on personal loans secured with junior liens.

We purchase a 60% interest in the property for $200,000 cash to him to repay his personal debt, $200,000 put into our newly formed LLC for tenant improvements and property improvements, and we paid off the 13% mortgage and replace it with a 4% fixed interest 20 year loan from one of our banking sources. We then proceeded to sell off the back building that was empty to a warehouse fulfillment company and paid ourselves and the original investor a large payout, while still maintaining ownership of the main income producing retail center.

Noah Wright · Answer

Depends on how clearly you can see the exit and how much control you need. Private money is priced for a short term, so if your timeline is tight and well defined, the interest might cost less than the equity you'd give up. But if the deal stretches, that rate compounds and the equity might be cheaper in the long run. The bigger difference is control: a partner gets a vote, a lender just wants their money back. And on risk, a partner loses their capital if it fails, a private lender can take the property and come after you. Most investors I know use private money for flips or short holds, and partners for longer holds or when they need a skill set they don't have. What's your exit look like?

Erik Estrada · Answer

You should also keep in mind the shared risk on the equity side. While private money is more expensive, they do not really share the same risk as you. If you default on their loan, they take the property and charge default interest, etc.. A partner risks losing their contributed capital and the deal/property..

Bryce Axelrad · Answer

I’m a lender, but I lend debt and equity so I can be unbiased here. So my first question is how clearly you can see the repayment. If the exit is close and well defined, I’d price the debt over that actual period and compare it with the equity you’re giving up. That being said in the longrun equity will always cost more than debt unless you're dealing with genuine loan sharks.

If the project needs time and the exit is less certain, I’d give more weight to a partner who can stay in the deal. I’d also look at who decides what happens if it runs over budget or needs to be sold. Borrowing doesn’t automatically mean full control, and equity isn’t automatically cheaper. The agreement and the way the deal performs decide that.

What actually changes once you bring in a partner or private money for the first time

What actually changes once you bring in a partner or private money for the first time

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