Risks in Selling Equity in Multi-Family Properties to Investors

[Daniel Spear]

Hello:

I have been talking to a multi-family property owner who has said that he is considering selling equity in his property to an investor for a guaranteed return. This seems like a great way to leverage your cash flows to get immediate equity out of a building. It is also an interesting way to create valuation for a building. Basically, you take the existing mortgage amount and add however much it would take to keep the investor whole in his or her return.

What are the downsides of this approach? I imagine that the legalities are complicated and if the building fails to cash flow at the expected amount or the owner needs to sell and cannot get the assumed equity out of the building then the investor might be unhappy. What sort of risk premium is typically applied to this sort of practice?