Structuring Partnership Options

[Fred Gaston]

I am looking to begin co-investing with an experienced investor that currently owns 65 homes.  Her strategy is to buy in marginal neighborhoods and cash flow them over a long term.  Since she is fully invested, she has minimal liquidity and is looking for me to give her sweat equity in exchange for her being property manager.  I would love some help analyzing the options below.  Additional input:

-she's 30 & I'm 58, so she has a longer time horizon for holding.

-my experience is more in flipping, not accumulating rental properties, there is a mentoring aspect to this.

-I'm looking to build passive income for retirement

Thank you in advance.

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First, I am assuming a purchase price of $43,000, plus $7,000 in legal and renovation cost - total basis of $50,000. Assume rent of $1,200, so $14,400 gross per year. Net should be around $10,000, or 20% per year.

A few ways to structure:

1) You purchase property, and I receive an immediate 20% sweat equity stake ($10,000). Net income is distributed pro rata, and I have the option to buy additional shares in the property at an ascending cost of 5% per annum at a maximum rate of 10% of property per year (so in theory you own for eight years). Prepayment, if allowed, would require a put option of 10% above remaining amount due.

2) You purchase property, and I receive an immediate 10% sweat equity stake ($5,000). Net income is distributed pro rata, and I have the option to buy additional shares in the property at cost basis, at a maximum rate of 10% of property per year (so in theory you own for nine years). Prepayment, if allowed, would require a put option of 10% above remaining amount due.

3) You purchase property, and I receive 50% equity, with a note due to you which accrues 5% interest per annum until paid. Note is amortized over 10-15 years, fixed, with monthly payments. Net income is distributed 50/50. Prepayment, if allowed, would require a put option of 5% above remaining amount due. Additional 50% of property can be purchased at end of loan for an ascending 5% per year above basis.

I take a fee of 10% of renovation expense for GC services, plus 10% management fee.

In all cases, if we sell, profits are distributed pro rata.