Buying First Rental Property

[Brett Riemensnider]

Hi my name is Brett. I currently own a home that I live in with my family of 3, we have about $80k in equity and our mortgage rate is fixed at 2.62%. I have about $20k I could put into a deal myself of my own money. With only $20k down that doesn’t seem like a large enough amount to go into a deal expecting to cash flow in this market. So my idea was to find a partner to avoid taking out equity.

I have a friend who has been looking to purchase a home but he has been getting cold feet. My goal is to present him with a 50/50 partnership on a small multi family or single family home that he himself will be living in. My benefits being that I have someone occupying one of the units before we even find a deal and we both benefit by adding twice as much money to a down payment on a property.

Now here’s what I’m struggling with. If we were to do that, how would you recommend handling his unit’s payment? On top of that, what does it look like with everything outside of “rent”? Utilities? Parking? Snow removal/lawn care if we went small multi family? Since we are partners and he owns half, would his unit still be expected to pay market rate rent? What would be the best way to go about properly dividing our finances to have a true 50/50 partnership? I want to approach him with a sound business plan that makes sense before we start looking at properties together. Thanks for taking my question.

[James Hamling]

A few things to unpack here @Brett Riemensnider

First thing, on "partners rent". Keep it simple. You, as a business venture, own the property together which is a 4-profit rental property. 

Your partner just so happens to be a tenant. Make sense? It's unnecessary to overcomplicate things. So if he is doing say yardwork and snow clearing, than pay him just like you would a caretaker. Again, simple. 

Next, the $. 

Your talking $20k down, and as JV possibly $40k. Where are you talking? Twin Cities? Central MN? Southern MN out among the corn-stalks?

In the Twin Cities, a decent MFH property, with $40k down.... I mean, it's theoretically possible but in real world application it's gonna be threading the needle BIG TIME. First, you got the financing side of things, right, gotta clear that hurdle of getting approval for a viable enough amount, and it's gonna have to be owner-occupant financing, 20% down is a big-time no-go right so need to do that minimal down. 

Well, here is the thing, while many agent's are gonna come on like wolve's pressing how happy they are to help you do that, stop and think for a moment. Your leveraging all your capital on the acquisition. What will be left for rental licensing? If any vacant unit's, getting this listed and leased. Carry utilities. For any "what-if" issues, so now we gotta make absolutely certain this place is in the 9's and fully turn-key because you don't got the $ for a boiler replacement. See how tight that needle is getting to thread. 

And now, keep in mind since you have that tiny down, and it had to be in 9's condition, your leveraged to the eye-balls and cashflow is near to non-existent. Add in partner saying "wtf, I don't want to pay FULL market rent" and now it's NOT cash-flowing. Which means no added capital for any "what-if's". Meaning, your 1 water heater, 1 roof, 1 furnace, 1 whatever away from trying to get a heloc or whatever to pump more $ into it. 

And with your friend being Mr "Almost did it" that tell's me he is BIG-time risk adverse, meaning he isn't gonna want to hear "trust me, it will be ok", right. 

Starting to see how NOT easy this will be? Again, possible, but wow beware of the "oh this is easy" BS. Making a commission off your buy is easy, getting you setup so a year down the road we see eachother and it's a high-5 and hug's, not so easy. 

I'd first find out where he, or you, or whoever will be living in it is open to living. Then say "ok, so near there is ok" and if he says "sure" say "ok, so if can be a few miles form there were ok" and just keep stepping it out to find the red-line, because odd's are what you can get into won't be where you "want" to be, but it's a stepping stone, keep that in mind. 

And remember getting in is just the 1st expense, it will not be the last by any stretch of the imagination.