New Investor With Backing: How to Structure the Deal

[Will Melton]

I am new to investing. Really new. I started with BiggerPockets over the weekend and have immersed myself. By far, I still have much to learn. I have purchased a number of books and am going through my business plan in my head before I get it out on paper. Part of the issue I am running into is with where to start. (I have listened to 10 or so podcasts and have read the Beginner's Guide to Real Estate Investing.)

I am looking at moving to New Haven, CT and was scoping out the market for my first ever home purchase. Along the way, I thought about buying a multifamily and renting out what I was not living in. I am still considering this, but in my excitement, I started talking to some of my business contacts.

One of my long-time customers (I am a partner in a couple of successful businesses) who has plenty of means has offered to back me on my buy, but agrees with me that I should pursue an apartment building. I am thinking of doing both.

Right now, I am trying to figure out how I should work with him. He is older and mentioned he prefers stock because of the liquidity, but we have a good relationship and I think he is more interested in helping me get a start, but will not ignore his desire to get a return. Do I ask him for a portion of the purchase for a downpayment on a commercial loan? Do I consider getting him to fund the entire purchase and take it as a loan or work him in as a partner? In either case, would it be easy to refinance an apartment in 5 years or so so he can cash out?

I know that I have to find a good deal and get my business plan ironed out before I can ever ask him for a dime. I understand all of the concepts in finding a good deal and have connected with some people in the market who are willing to help me find deals, but I see an opportunity and I know I don't have to act tomorrow, but I feel the need to accelerate my knowledge in this specific area in order to pursue this option.

[Russ Wallace]

Will, it sounds like you should get to know your prospective business partner better before working on the deal structure. Ask him a lot of questions: what does he want the investment to do (create cash flow, grow his capital, both?) what type commercial properties is he comfortable owning (apts, mobile home parks, office, retail, etc), what role does he want to play (equity partner, co-manager), when does he want the initial investment returned (five year hold period, longer?), what is the annual return/IRR he wants, (10% cash-on-cash, 20% IRR), etc.