Best way to use OPM

[Briana Norris]

I have been approached by a family friend that has watched me invest over the last year and wants to use his money to invest with me. Does anyone have any suggestions on the best way to use/borrow the money and how to structure the business relationship? He is willing to start with a $500,000 investment.

[Brad Johnson]

Depends if he is looking for equity risk / equity returns or debt risk / debt returns or if he wants to help you build an investment company where he would have have equity at the partnership level. If I were you, I would first discuss his goals and risk tolerance.

For equity investors, we typically provide a preferred return and then a split of the remaining profits once the investor's principal (with compounded interest) has been returned. There are infinite ways to structure this, but a 6-10% preferred return to the passive investor followed by 60%/40% or 50%/50% of the remaining profits is fairly common for non-institutional (small deal size) real estate investment partnerships.

You could also form a general partnership (similar to a "seed fund") with him where he contributes cash into the partnership and you find deals and investors. The $500K would largely be used for the partnership's equity contributions (5-10% co-invest) into each deal you acquire. The remaining 95-90% would be funded with passive equity from outside investors. This structure would allow to you acquire the most properties and would diversity your friend's exposure, but of course you'll need to find additional investors to invest with you.

Regardless, this is a good problem to have, I'm sure you'll come up with an equitable arrangement.

Brad

www.parkstreetpartners.net