"Advice" on partnering as a silent partner

[Stephen Heebner]

Was hoping to collect some wisdom here on being a silent partner with someone on a RE deal. I would be bringing the down payment (about 30%) but otherwise I would like to be a silent partner. He agrees to this gladly as he would be managing the property and ultimately our goal would be in about 5-7 or so years to refi me out (or whenever it makes sense). The reason for this is, my understanding is I cannot loan a down payment? I would want to be paid monthly as if I were just lending money. Do we just structure a partnership? What would be some options for us? This person and I have done a previous deal together but very different circumstances, so we have full trust in each other. Thank you all!

[Stuart Udis]

This sounds like an LP relationship where you will receive membership interest in the deedholder LLC. It is true, a lender will not look favorably at a scenario where the borrower is relying on a loan for the down payment. That's why investors capital such as yours is customarily treated as equity, not debt and and receive ownership interest. There are certainly people who skirt the rules by not disclosing the nature of the downpayment money or where it comes from but it seems like your partner is doing this the right way. You should still negotiate your rights and obligations as an LP investor.

There are also more legitimate examples commonly referred to as mezzanine debt. This is typically seen in larger transactions with bigger check sizes but is also complicated to originate because an intercreditor agreement will be required by your lender.