Questions about waterfall structure

[Jamie Douglas]

Hi,
We own a few rental properties now and have a contact who is interested in joining as a significant silent partner. He is interested in a waterfall structure of some sort with a preferred return and he's asking us to make a proposal of what the various hurdles would be. We will be putting in 20% of the capital. We've not done anything before with a structure like this and I've been reading about them here and elsewhere, but I have a few basic (I think) conceptual questions that I'm not understanding.

Our goals for these single family homes is to buy them, rehab, rent for 10-15 years, and sell. Most of the waterfall examples I see seem to assume a short term project where there is an initial investment of cash that is then paid back within a year or two at the point of sale of the property. How does a waterfall work when you would have a long term of rental income? At what point are you paying back the initial capital - all up front with all cash flow that exists or until the end at the sale?

We've discussed in general waiting until the house has a tenant and rental history and then getting a cashout loan to invest further in other houses.

Also, I'm confused about how the IIR is calculated in general. If the capital is being paid back early in the life of the property, does that mean the IIR is increasing because there is actually less and less capital in the property? Or is it calculated based on the initial investment.

Lastly, most of my searches have been for things like waterfall structure, or iir waterfall, or preferred return waterfall. I've found some information but not a ton - is there some other name for this kind of structure that I could read about? I feel right now that I have more quesitons than answers :)

I know that often the answer is 'you can structure a deal however you like' but if someone could give me some guidelines of what is typical, that would be very helpful.

Thanks