What is the best way to structure equity deals with partners?

[Ricardo Nunez]

Hey All,

First time caller, long time listener.

I have finally decided that the real estate market is the direction I want my life to go in. I took the first step by buying a home cash 6 months ago. Unfortunately, I did this before I started doing a lot of homework on investment strategy and am now left with zero down payment for any houses I find on the market. Currently I have access to a pretty sizable mortgage loan and qualify for the FHA program as the area I am purchasing in counts as a relocation.

My question is this: I have the the loan ready to go but I have zero money to put down. I have multiple partners I could work with but I am finding it incredibly difficult to figure out how to structure the equity in the deal, as the partner would need to front 100% of the down payment and I would provide the loan, as well as all of the work (finding the deal, making the deal, rehab, finding tenants, refi, etc).

I would greatly appreciate any advice you all could provide.

If this influences the advice at all; I am looking to purchase a Multi-family home (Quad) in San Diego, where finding a good deal is proving to be difficult due to the high market. Rents are high but so is pricing as supply is low and demand is high. I am aiming to use the BRRRR! strategy and want to go full force into attaining multiple properties in 2020.

Best wishes to all and happy holidays.

-Ricardo

[Justin R.]

@Ricardo Nunez Every project I do now includes two roles - those that do the work and those that provide the capital.  Sometimes it is one person fulfilling both roles.  Sometimes it is multiple people in each role.  Sometimes it is one person in one role, and one in the other.

In every case, whomever provides the money first gets a nominal return on their cash - say, 6% - as a project level expense.  Then, the equity is split based on a combination of three things: who found the property, who is providing the credit for a loan, and who is spending their time to execute the project.

I always structure this like a syndication deal, even if I'm the one providing all (or almost all) of the capital.

If I were providing all the purchase and renovation capital on a $1MM project (which is what a 4 plex in San Diego would be) for someone I know has experience and a lowish risk project ready to go, I would be looking for something like 6% + 50% of proceeds until I get to a 22% annual return.  That 6% is called a preferred return and the 50% is a waterfall.  The person who puts it all together is called the sponsor.  You can up the preferred and lower the waterfall cap.  Or, if the sponsor provides some capital that is junior to the investor capital, you could lower the return profile for the investor.

More importantly, though, there are challenges to having an investor provide the downpayment for an FHA loan on a property. There are major challenges finding a 4 plex that you can even 50% BRRR (much less 100% BRRR). There are challenges getting an investor to trust you if you're new to the game.

When working with people who are new, I generally keep title while they execute the project as a way of containing risk if they go berserk on the project.

Find a high quality project - the rest is easy to figure out and will fall into place once you know a few people.