Two options on lending. I am looking for your opinon

[Devin A Hanley]

Hello. I am reaching out to the community to get some opinions on the 2 options that I currently have for a multi-family that I am under contract for. It is worth noting that in both of these scenarios I will be managing the day to day operations of this property and my partner would be relatively uninvolved. And I am planning on holding onto this property for a long time.

Option 1: I have someone who is willing to partner for this property. They will put up the 25% down payment and for that they will take on 40% ownership of the property. Meaning that they will take 40% of the profits every month as well as 40% of the profits if we decide to sell. I will be responsible for servicing the loan which I will do from the rents we collect. With this we would have a loan set at 6% for the first 5 years, then it will change to what ever the 5 year treasury is, plus 2.75 points. With this deal I should cash flow $1100-$1300 per month.

Option 2: I have an offer for a 30 year loan with zero down payment. The payments would be interest only at a 5% rate. At the end of the loan I would then need to give them the full payment for what the loan was for. If I were to do this I would not have a partner. There is also no penalty for paying this off early. Because this loan gives a lower monthly rate and I would be the only one collecting it my cash flow monthly would be closer to $3000.

With option 2, I will be paying about $200k more in interest over the life of the loan. And, I will profit less at the sale of this property because I will have not paid down the principal. BUT, I will make over twice as much while owning it, and at the time of sale I will be able to keep 100% of the profits rather than paying out 40% of them. This is in an area where appreciation will be slow, but I am sure there will still be some over the next 2 to 3 decades.

And, just in case it helps, the purchase price of this property is $485k. In option 1 the loan would be for $363.5K. And in option 2 it would be for the full $485k.

I am curious what your opinions on this may be. I am leaning towards option 2, with the idea that I would be able to re-coup much of the extra $200k I pay in interest at the sale of the property. And that the extra $2000 per month will have a more dramatic impact for my family. But, I may be missing something here....I'm just not sure what that is?

I appreciate any insights or opinions that any of you may have. Thank you!