Advice on Investor Payout when Selling a Rental

[Mykael Williamson]

I need advice on how you would handle a situation where an early property liquidation had to occur for whatever reason.

Scenario:

Partnership deal - I found this particular property, manage it, and carry the financing obligation.  A cash investor brings the down payment and closing costs.  We split all profit 50/50.

Using super simple numbers to make the math easy. Assume 20% down, 50% rule on expenses, 4% interest on the loan. $1,000 to close.

Purchase: $100,000

Down and Closing: $21,000

Rent: $1,000

12 months pass and for an unforeseeable reason we have to sell the property!

Sale Price: $105,000

Closing Costs and Agents: 7% , $7,350

Loan Payoff: $77,125

Remaining from Sale: $19,058

The deal has cash flowed $1,400 in those 12 months. We each received $700.

SO - what do I do with the $19,058?  My gut tells me we make the cash investor whole first and foremost.  Look after them and make sure they get as close to $21,000 of their money back no matter what.  Even if it means I have to pay to get them back to $21,000.  As it stands in the scenario above they will get $19,058 + 700 = $19,758. 

Do you agree I should write a personal check for $1,242 to get them whole?  I would never want to treat an investor as less than absolute gold and risk losing access to capital.  

Do you all agree?