Equalizing Equity on Deal with partner...how would you do it???

Question

Hello,

I am looking for some insight from the seasoned buy and hold investors.

I have sourced a off market deal for a 8 unit that is well maintained, but under rented.   As is the agreed to purchase price is about 50-75k less then appraised value.  I am looking to bring my

partner in on this, but I want to equalize the equity.

Right now the structure would be some private money and seller financing so we can get in to get our property manager in their to increase the rents and within 6 -8 months or so we would look to refi up to 80% LTV.

Would I have my partner pay me have of the starting equity position as everything would be 50/50 going forward?

Would you structure it differently?  Please let me know.

Appreciate the time!

John Fortes · Answer

If your investor is truly passive, please consult with a security attorney as it sounds like you can be getting into selling a security territory. Start with @Kim Lisa Taylor @Mauricio Rauld @Amy Wan & @Jillian Sidoti to get the ball rolling.

Gaspare U. · Answer

You found the deal, you seem to have the business plan in place (owner finance, rehab, increase NOI and refi), the PM company and the necessary capital to close. Seems you are 100% owner if you ask me.

I would offer my friend an invite only because they are, well my friend. I would propose a deal where I am NOT getting any fee from them as they may look at this as a slight. But perhaps they put 75% of down payment and we split profits 50/50.

Or come up with something that you feel is fair. After all you are in a position to say my-way or the highway.

Just my thoughts...

Eric Kundinger · Answer

@Amit Ronghe That really helps.  Thank you Amit!

Amit Ronghe · Answer

@Eric Kundinger so your private money source is a debt partner not an equity partner. Is that right? Also if you don’t need to have a partner on for this deal, I would recommend going solo. If your partner is not bringing in money nor is being an active asset manager I don’t see why you would want to get him onboard but if you do need to then you already have a leverage over him and ask for 60:40 in your favor and may be agree on 50:50 as you negotiate.

But if your private money source is an equity partner then typically you should get an acquisition fee from them (you may also get this fees from debt partners as the acquisition fees will be part of your acquisition costs again anything can be negotiated ) but then they would get/expect something like 70:30 or 60:40 split depending on the money they put in the deal. In which case you and your partner will split the 30% or 40% between you two. Again I would recommend if you don’t need a partner go solo.

Eric Kundinger · Answer

@Amit Ronghe Hey Amit,  thank you for the thoughts.

The private money would be the bulk with the seller holding the rest while we get in there and get some minor repairs done and rents up.

My partner would not be the active manager on this and yes our LLC would be on the note.  My thought was if I am bringing him into a deal well under market was to get something up front from a as is appraisal that would equalize the equity position.  I don’t absolutely need him on this, but would like to include him.

Less then conventional on this one, but getting creative to put together.

Amit Ronghe · Answer

@Eric Kundinger to be honest, anything can be negotiated but if I understand it right the private money will bring in the down payment and the seller financing is the rest? Is your partner the source of the private money (I assume so)? Also will he be active asset manager or more of a passive investor? Depending on how much money he is putting into the deal he/she will expect more share than 50:50 split as it’s his money on the line. When you refi, are you both going to be on the note? There are a lot of variables and combinations that may play into it but again as I said everything is negotiable. That’s my 2 cents.