My Partner gave me 25% on the Cashflow...Is This A Good Deal????

Question

My Wife and I recently decided to become real estate investors. We've read books, watched podcast, attended seminars and even are in the process of closing on a long distance single family as I type this...

Admittedly, I wasn't 100% thrilled because I wanted to go into a long distance Multifamily property @ 3.5% down instead of a Single family but after looking at the numbers I was ok with *$400 a month cashflow + 26.6% CoC ROI on our first time ever at bat. I'd call it a single w/ an RBI.

We recently decided to partner with a friend who was interested in how we were going to become investors (They've thought about investing before but didn't know where to start). My Wife took the friend/partner on a trip to where we invest and found a 5 unit Multifamily property. $200,000 offer accepted.

To my understanding we talked about a 50/50 partnership. Things changed for unknown reasons, and now...our Partner wants to do a 75/25 Partnership instead because she's willing to put up 80% of the down payment = $20,000 and my wife and I to put up the remaining 20% = $5,000 - - we'd be all in for $25,000 total

I ran the numbers using the BP rental property calculator on the 5 Unit Multifamily, and Cashflow = $1,560/mo

Cashflow = $1,560
Partner = 75% of $1,560 = $1,170/mo
US = 25% of $1,560 = $390/mo

I understand that $5,000 for a 25% stake on a rural 5 unit Multifamily on 1acre of land isn't that bad. I guess I had my mind set on a 50/50 and but I am bringing a lot to the table here.

**** The Question is, If you brought someone to the table who has some money and they used many if not all of your resources to obtain the deal....would 25% on the properties cashflow be worth it to you ****

Sorry For the long winded post. The details were needed.

Will Fraser · Answer

Hi @Bryant Wilson!H&%$* no! Flip that proportion around and it'd be fine, but this potential partner has it backwards. It is VERY normal for people new to real estate investing to think that money is the scarce resource. However, after a few minutes in practicing the art of investing you come to find out that 1. real deals and 2.trustworthy providers are considerably more rare than capital.So, while their thinking is understandable for a total newbie, it doesn't reflect reality. If they had brought the deal, managing it, and are guaranteeing the loan then maybe that's worth talking about a skewed split, but that doesn't seem to be the case here.

Kevin Sobilo · Answer

@Bryant Wilson, I would politely say no. Why didn't you have a partnership agreement or form an LLC before making an offer? These would have laid out what equity stake each of you would have. It isn't just about the return on investment. It also has to do with decision making. Will they control how the property is managed? Will they make decisions on rehabbing units with an eye toward increasing rents for example? It sounds like a good cashflowing deal, why would you accept a small piece of the pie after it was your experience that lead to the deal. Deals are harder to find right now after all.

Ben Grubb · Answer

@Bryant Wilson on the bright side, any future expenses should be split 75/25 also. That includes capex, renovations etc.

Theresa Harris · Answer

Unless you are living in it, it is unlikely you'd be able to buy a place with 3.5% down.If you went in planning on doing 50/50, then say that is what you'd like to stick with. There is nothing wrong with them asking for 75/25, but it doesn't fit with what you originally agreed to.

Bryant Wilson · Answer

@Kevin Sobilo We’ve only talked about what the agreement would be. I wanted to sit down with a real estate attorney and lay out those details...The offer was sent I guess out of excitement about the property but mind you I wasn’t there to pump the brakes on anything 😩

Bryant Wilson · Answer

@Ben Grubb I hear you but that still doesn’t sweeten the deal for me lol because I feel as if I brought a lot to the table here + had the money for a 50/50 I almost like - 25% of the cash flow- 0 % of expenses- 25% if sold or Refinanced

Kevin Sobilo · Answer

@Bryant Wilson, well then you are still in negotiations with your partner(s) about the agreement. So, no shame in saying no and that you want 50% and explaining why. Its not personal even if you have a personal relationship with them. Also, a good lesson learned that we should hash out partnership details before starting into a deal. On the bright side you have what sounds like a good deal and a willing partner. Not a bad position to be in at all.

Bryant Wilson · Answer

@Will Fraser that’s how I’m feeling plus my Mentor is also my property manager so... I definitely felt a bad pit in my stomach when I heard the news

Bryant Wilson · Answer

@Joe S. Not hard at all...It’s plan A - the property we’re closing on appraised 40k over what we’re getting it at so it’s looking like we made money on the buy already...We have enough to close on the 2nd property ourselves but wanted to bring along a friend because they saw that we’re serious about investing and wanted in.

Joe S. · Answer

If you’re not happy with the deal now you won’t be happy with the deal later. Simply tell them you’re not happy with the deal and move on to solo investing with you and your wife. How hard is that?