Should I give my investor equity or just straight ROI?

Question

I currently own 18 units in Upstate NY and am running out of capital to invest in my next MF property.  I've never used a partner before and am honestly a little hesitant.  I like to have control and do not want to feel the pressure of having a partner.  I don't mind the pressure on myself but bringing someone else into the risk is what is holding me back

I'm wondering if I should look for an equity partner or if just going hard money is the better way to go?

Also, what would a good split be if I am willing to manage it and split repair costs?

What ROI is decent for hard money?

Any suggestions would be greatly appreciated.

Thanks,

JS

Justin S. · Answer

David,

That is exactly why I am looking to do this.  Thank you again for your advice.  I can tell that it will come in handy in my future deals

justin

David Nolan · Answer

Hi Justin I forgot to mention in my post that when considering partners it is always good to identify the real dollar value of YOUR input. There is always plenty of money trying to find a home, but finding and being able to deliver on good opportunities is more valuable. 50/50 is too simple an approach and a mistake made by many novice investors, yours truly included once upon a time. Today I have a very clear understanding of what I bring to a deal and charge accordingly.This way I never feel like I paid too much for the use of other people's money. The only reason I ever use other people's money and the reason, I think, you are looking at this now is to leverage my skills and take advantage of more opportunities than my financial capacity would normally allow and that is what is done by all the most successful real estate investors the world over.

Good luck with your deals!

Justin S. · Answer

Thanks Dave and John,

Yeah I think the hard money route  is the way to go for me.  Im trying to explore new ways of acquiring property, so I looked into the equity partner thing.

Ive done hard money in the past for the 20% down and its pretty straight forward.  I get mine at 14% which is a touch high but we are talking a small amount extra for the first year until I pay it back

John Thedford · Answer

You answered your question. You don't feel comfortable and want to maintain control. Others may differ, but I feel the same. Many attorneys will tell you the first 4 pages of a contract are how to set up a JV or partnership and the last 100 pages are how to dissolve one. Keep things as simple as you can.

David Nolan · Answer

Hi Justin

I might suggest to you that if you do take on an equity partner and you enter into a written agreement with them be sure to write into the agreement how you propose to end it. Imagine you are getting divorced from the partner, what would you want and what would you want them to have? If you write the divorce settlement when you are both friends and not under financial stress or have had disagreements over the deal you will find it much easier to undo if anything goes wrong between you both as partners. Trying to fairly negotiate when their are bad feelings between people is very difficult indeed.

However, when I take on an equity partner I would usually offer them a fixed rate of interest on their money, say a couple of points over bank rates, plus an agreed profit share when the project realises a minimum amount. This locks in my profit for my IP and effort, assures them of a return on their capital and allows us to share in the profits on an equitable basis. I would only look at 50/50 if the partner brought a similar value to the deal as I can. That means money, skill, time, commitment and a common understanding of our objectives. However, i would also write the divorce into the agreement no matter what the split.

Hope the project goes well for you!

Justin S. · Answer

Yes I am tapped out of my equity for probably another 2-3 years.  I do have 30k available from my own home equity but I keep that open for emergencies

I just don't like the idea of giving up equity.  My gut tells me to take the hard money and try to refinance later.

I love opening it up to all of you and getting all of the feedback.

I love learning different ways to accomplish my real estate goals!

Steven Segal · Answer

Justin-

I agree with Ben on what he was saying. With that said, what is your issue with refinancing your current portfolio with a bank? Do you currently not have enough equity in it to get a sufficient amount of cash? Can you not get a standard mortgage on this multi-family (either commercial or residential depending on # of units)? Hard money is pretty expensive money and makes cash flowing positive pretty difficult.

The setup you have with the partner would be a big thing. I have several rentals that I did a combination of debt and equity with an investor. Some partners may just want to be capital investors and let you run it all. That is not necessarily a bad thing to have going for you. A lot of people see the potential of real estate but don't want to put in the work in dealing with it. You could also ask for some sort of asset management fee in that case. It can also be beneficial in the future, especially in value-add plays when lending is more difficult to obtain. I now get my money cheaper from my private lenders because I have a proven track record with them.

I have also had partners that were not only capital partners, and the one thing I would say is make sure you have an extremely good understanding with them beforehand. We all have different goals.

Steven

Justin S. · Answer

Ben

I appreciate the feedback.  I agree with your thoughts on a partner.  I also agree that hard money will be cheaper.

I have a meeting with my lender tomorrow.  Im definitely going to find out about the Refi requirements.

Thank you for the offer on the contract

Justin

Ben Rutkevitz · Answer

Hi

@Justin S., Most hard money lenders will be looking for a 10-15% yield on their funds. This will be an interest only loan with a balloon at the end of 1 or 2 years.  If you can find a local lender, it will reduce your upfront costs associated with getting the loan. If the lender knows the area well, he may not require a full appraisal.

I suggest talking to your local banker about what requirements they need to refi you out of the hard money loan once you own the property. Always give yourself extra time as traditional banks tend to take longer than they quote you.

If you find a good lender, the hard money lender option is usually cheaper than taking on a partner. The good thing about a partner is that they can add value with the experience and resources they bring to the table. I would suggest you have a tight partnership agreement in place including a buy out clause that defines what happens if one partner wants out before you sell the property.

I would be happy to help you look over the hard money contract and give you my opinion before you sign and send in a deposit.