How do I determine what to pay a silent partner?

[Natasha Esguerra]

Hi guys,

I'm looking to purchase a duplex (first rental property) and live in one side at least initially. My best friend inquired about being a silent partner and that he could help with the down. We're considering a 15% conventional, and we'd each do 7.5% down. My husband and I would be living in one side at least for the first 6 months, fixing it up as needed although it seems pretty turnkey. We're currently living in my mom's house and getting that ready to rent out as well which should cash flow nicely. For this duplex we are looking at, if both sides are rented out, the pure cash flow is between $348 (worse case due to CapX, repairs, maintenance) and $1208 (best case). If we live in one side for a year, then me and hubby would need to pay around $500 to cover the remaining mortgage, plus utilities and stuff which still isn't bad.

I guess my question is, if my friend puts in 7.5% down (50% of the down), how does one figure how much to pay him each month? Especially if I'm living in the one side initially and I'd be doing all the managing? What do people typically do? I'm new to investing but also definitely new to the possibility of partnerships.

[Kimberly Marshall]

I would just ask him what type of rate of return and terms he would be happy with. Once he gives you the answer, you run your numbers and see if that works for you and your business strategy. I have someone who wants to invest in my deal but only wants to invest $10,000. It's not worth it for me to use that $10,000 to just give them a return. I have someone who wants to give me $50,000 to invest in my deals but wants $10,000 return within 12 months. That's a 20% return. No way in the world. Hard money lenders don't even charge those rates. You would also need to figure out if YOU want to share your profits or give a return to him for a long period of time if you plan on holding onto a long term rental. That's a no go for me. I don't want someone in my pockets for more than 8 months. If they ever decide they want out, that could put me in a bind. So that is something to think about. For me, I will allow someone to provide at least $40,000 (because that is enough to cover all upfront out of pocket costs for a BRRRR or flip in my Maryland market) and will give them up to 8% interest based on the number of months I use their money. For example, if they gave me $50,000 for a BRRRR, I would ask them what type of return they would be happy with. Anything over 8% is a non-starter. Anything less than that, I run my numbers and if I can still meet my minimum profit requirements then I will agree to it. So let's say they want 5% return. Based on a 12 month term, the annual return would be $2,500. when you divide that up over 12 months, that's $208.34 a month interest only payment. Let's say it takes me 6 months to buy, fix and refinance my BRRRR into a long term loan. They would get a check for $1,250 at the end of 6 months. Where else can they get that type of return.

The first priority to know what numbers and terms work for MY/YOUR business.  Hope that helps