Partnership with No Value Add

[Steven Burke]

Good morning!

I'm a beginner in real estate investing and I'm looking for my first deal. My local market is extremely hot and 2-3 bedroom SF houses around 1000 sq ft sell for a minimum of 175k. There is a 2/1 apartment that came up for sale recently priced at 118k. We looked at it yesterday and it is in good shape, so there is little to no value add opportunity in this property. It would produce a cashflow of $175-$200/mo with a COC of 9-10% (something that I would be okay with).

I am looking to partner with my dad on my first deal because I don't have all of the cash for a down payment. My question is - how would you structure a partnership with a non-value-add deal that produces $200/mo on a ~$26.5k down payment? All of the normal methods don't seem to produce much return for my dad, and even if he got 100% of the cash flow it would take 7+ years for me to see any profit. Any ideas on this? Thank you!

[Nathan Gesner]

A hard money lender would likely charge 8-12% interest.

A home equity line of credit (HELOC) is running around 5 - 6%.

If he invested his money with someone else, he would expect a fair market return on that investment. Don't take advantage of his generosity. Offer him a fair interest rate based on the level of risk, the type of loan, length of loan, etc. If he offers to charge you a lower interest rate, accept it graciously.

You are only paying him interest on the money borrowed. It has nothing to do with your return, the value of the home, cashflow, etc. Let's say this property costs $100,000 and you need $25,000 for the down payment. You agree to pay your dad 8% interest. The loan is amortized at 30 years but you agree to pay him back within 5 years (this is called a "balloon" payment). After a year or more you should have enough equity and experience to qualify for a standard bank loan which will enable you to pay your Dad back.

$25,000 loan

8% interest

$183.44 monthly payment

I hope that makes sense.