What is a reasonable equity position?

Question

Ryan Enk · Answer

Hey @Dave Binder.  Here is why and how I structure my deals between single family or multifamily:

There are two reasons to partner in my opinion:

1) When you don't have something someone else has: money, credit, time, skills, resources.

2) When the partnership will help you hit your goal faster and easier.

In single family homes, if I take on a partner for a flip, then I typically structure it in a 50/50 LLC. 50 is the money, and the other 50 is the sweat equity.

If it is a single family hold, then instead of doing an equity split, I just offer them 6% to 12% interest only on their money until I sell the property.

Apartments are a little more complex, but still not hard to accomplish.  I split apartments up between LP and GP.  Limited Partners are the passive income cash investor, and the GP are the ones doing the work and putting the deal together.  Typical equity percentages between LP and GP are 50 to 80% equity for the LP, and 50 to 20% for the GP, depending on the deal.  I also typically offer investors a 4 to 10% preferred return on the cash flow before those splits take place.

Then on the GP side there may be one or more partner, and here is how I split the equity based on the tasks performed:

1) Finding, Sourcing, Underwriting, Contract, Due Diligence Tasks- 5% of GP

2) Risk Capital- Earnest Money Deposit and Due Diligence- 5% of GP

3) Money Raiser- 40%

4) Balance Sheet Guarantor- 10%

5) Asset management- 40%

Hope that helps! I would have to learn more about your exact situation and the investors goals before I could make a recommendation for your specific situation.

Erik W. · Answer

What will rents be after "pushed up"?   $4K / $425K = 0.9%....  I know it's an "A" property, but those are thin margins for residential / commercial mix.

I'm not sure there will be much additional profit to temp anyone to bring that much money to the table.  Figure 50% of gross rents for all expenses, CapEx reserves, management fee (paid to money partner/PM) and vacancies leaves $2,000 NOI.  If you get 15% of that then that leaves $1700 / month for your money partner.  $1,700 * 12 / $425,000 = 4.8% cash on cash return.  If I were the money partner, I'd demand no less than 9% CoC, but even if you take 0% that money doesn't exist in this deal "as is".

Is there a lot of room to increase rents and/or value w/o putting any more money in this deal?  What's the ultimate goal/upside?  Value add?  Exit strategy?

Michael Slockers · Answer

@Dave Binder I think having the open conversation is the first step. Everything is a negotiation and you control the deal right?

What are your goals on this and other properties? You are offering to trade your time each month for a higher equity.... They are offering you completely passive equity from this point forward. That sounds great to me. That would free your time up to find more deals instead of dealing with tenants and toilets.

What other exit options do you have? Could you wholesale it?

Dave Binder · Answer

Thanks for the insight, we are still negotiating terms but I was the one that built the relationship with the seller and brought the deal to the other party. I made the mistake of not expressing that I'd like to take on a bigger role so I could have a bigger equity split. They don't have much of a real estate background so I was under the impression that they'd find it and I would handle managing rents and assessing the repairs as well as using my connections for contractors. Apparently they prefer to handle those items I'm assuming to get the bigger equity stake.

Dan Mayo · Answer

@Dave Binder every deal is different especially when it comes to partnerships.  If you don’t like the 10% position ask for more.  Suggest 20% with a goal to land at 15%.  That would put you at $600/month passive income.  Remember this would be TRULY passive; they deal with all the day to day and tenants.

Imagine if you did have the money and purchased yourself.  Hiring a property management company could cost you between 8-12% of your total monthly rental value.  That means if that place is bringing in 12k a month in rents your paying out 1,440 per month.  Subtract that from the 4000k cash flow along with repair costs. You could easily end up at 2k per month cash flow with less time to pursue other deals.

We often get in this mentality of treating each deal like it will be our last and only.  This can cause us to make emotional decisions instead of strategic ones.  Remind yourself there will be other deals.

If you can lock down $600 cash flow without investing any time or money that’s a win!  Take it and go find the next one.  Hope this helps!

David Semer · Answer

@Dave Binder Congrats finding a deal that is half challenge.  Who has the deal locked up? Is it in in an entity you control or does he control it?  IMHO If you have control then when you are looking for Partners you should be upfront (just like they do on Shark Tank) I am seeking an equity partner to bring all the money and I want X% for putting the deal together.  You will either get yes or no or counter offers from those partners and then you can decide if you want to move forward with that partner or not.  With all that being said if you have no other partners who can get a deal done like this and this is your only option a piece of something is better than nothing.  Good problem to have isn't it? Best of luck.