credit partner arrangement - sandwich lease?

[Jeff Thompson]

Hi all, I have cash and great credit and income but work overseas and will be quitting/moving to attend school and invest, so shortly won't qualify for loans.

I would like to do flip into rental type deals (like Monica Breckenridge does), and my upcoming lack of income means credit partners might be my best option. I am contemplating how to secure my interest in the properties while not having them in my name. I'd like to set it up so the credit partner has steady income and neither of us has much risk by the other party. Here's what I've come up with:

I have cash to work with, so would like to do a hard money style loan to the credit partner for 70% ARV secured against the house, only sending the purchase price to escrow, keeping the rest for the rehab which I'll oversee. At closing we'll sign a long term lease with sublet rights and an option to buy at 85% of ARV (split the equity after the refinance). Something like this is often called a Master or sandwich lease I believe.

Lets put an example in here and say the purchase + rehab is 70K, ARV 100K, insurance $80, taxes $65, rent $1,200

I'll charge 10% interest only on the "hard money" which on a 70k is 583.33 and we'll set my lease to the hard money payment + insurance + taxes, so 728.33 in our example, and agree that we will split any changes in the mortgage, insurance, or taxes (PITI). I found a portfolio lender who does no seasoning refinances at 6.5% and 2 points, so when we refinance (which we will ASAP and do it again) the mortgage payment will drop to $442, so the lease drops to 647.67 and at this point the credit partner will start making $60.67 a month (hopefully I would have had a renter in and already making money).

I'll pay for the closing costs on this refinance and the next, which will be after 6 month seasoning to the typical style at around 4%. If we opt to pay points we will split those costs and the saving in the payment. With a 4% loan at 70% LTV we'll pay $334, so the lease will drop $54 to 593.67 and the credit partner makes another $54 per month to $112.67. I'll require proof of payment for PITI or more likely I'll pay them myself and provide them proof of payment.

I take responsibility for managing, maintenance, repairs, and must pay whether the unit is rented or not, so it's stress free, hands free income for the credit partner. They'll have 15% equity starting out and will gain further equity as the mortgage is payed down. In the example above principle will be payed down $100 starting out every month and increasing, so the credit partner is getting more than $210 a month all in all. Furthermore After deductions I'm sure they'll net a loss for taxes, so the income is tax free. In the event I exercise the option, they'll get their equity and If I break the lease they get the whole property, so their position is pretty solid with little risk. The only real downside is the effect to their DTI and credit.

Besides obviously making money on keeping the property rented, I'll make a profit in getting purchase + rehab under 70% ARV, or loose money if I don't. The credit partner gains equity in the mortgage payment, I gain in any appreciation. The option provides an out, but I don't think I'd use it unless things went bad with the partner or we decide to sell.

This seems pretty favorable for both parties with risks controlled on both sides, what do you guys think of this idea?