How to bring in a partner on a deal?

Question

My aunt is interested in coming alongside us as a capital investor on a deal. We’ll be paying cash for a trashed triplex, gutting & rehabbing it, putting renters in two units, and letting our 19 year old son buy it in a year as his first house hack to live in third unit.

How do I handle my aunt’s role? Go to a real estate attorney and draw up a contract? Are there templates in BP somewhere that would be appropriate for this kind of transaction? She is going to fund the purchase + rehab.  We want to return her money with interest in a year after Michael buys the property from us, and we’ll use the remaining money as seed capital for the next deal. Michael will collect the cash flow from two tenants, pay down his mortgage, and continue working & taking online classes while basically living there for free. He’s a solid, hardworking young man, so I think this will be a great opportunity for him. (If he changes his mind, we’ll just refi and hold it.)

Any advice for any part of this scenario? We’ve done a live-in flip with our own cash before, but we’ve never brought in a private investor and want to cover our bases and keep her safe and confident.

Any advice about the terms for our arrangement and what percentage would be appropriate to offer her? We haven’t discussed those particulars, but she has plenty of capital as well as confidence in us with this investment.

Kristin McPherson · Answer

Thanks, Guy.  Fun fact:  my aunt is from Corpus Christi!  I was able to square everything up with them over the weekend on a FaceTime call.  My uncle is a CPA, and he is drawing up paperwork to loan me a set sum with interest for a year.  He doesn't even want to be tied to the piece of property; he trusts me to use the money however I need to and return it in that timeframe.  It was a super encouraging conversation!  They were impressed with my pitch and urged me to go for it and pursue a successful real estate investment business.  I'm excited about getting started!

Guy Gimenez · Answer

Your Aunt is a lender, nothing more. She will have a Note (promissory note) and Deed of Trust. I draft my own in Texas but you should have your own attorney draft these for you, along with the deed. The Aunt will be in first lien position which protects her interest.

Kristin McPherson · Answer

If anyone wants to offer further suggestions or (or you're just curious about the rest of this story ~ maybe it can help someone in the future), my aunt asked me to email the details to my uncle, so I sent the following along with the BP rental estimates PDFs as well as the PDF from the tax assessor's website.

"Thanks so much for allowing me the opportunity to pitch this project!  I have immersed myself in education regarding real estate investing for the past six months in anticipation of our (***primary residence***) property going onto the market, and Chris & I have realized that there is great opportunity for our family to achieve financial independence sooner than we'd originally planned by adding these types of investments to our portfolio.  We would love to spend more of our time in family and ministry, and this is a wonderful side hustle to get our teen sons started on an additional stream of education and income as well as add to our own bottom line.The property we are considering right now is a duplex in ****** with a damaged garage apartment in the backyard.  It is in a desirable location near the beautiful historic downtown, the hospital, and a nice residential area.  It is truly the "worst house on the block," which is a gem from an investor's perspective.

The property is owned by the ******* brothers, and one of them occupies the left unit while the right unit is currently unoccupied.  They listed it last June for $80,000, and it was under contract for a couple of months before falling out of escrow in November.  The asking price has since dropped to $65,000.Hurricane ******* damaged the detached garage apartment, and while that unit does sport a new roof as a result of that catastrophe, no repairs were made to the interior.  It is therefore badly damaged with broken windows, mold, ruined floors, etc. Chris and I have discussed three possible strategies for this investment:

• Our first choice involves ****** (our son), who is very excited about this prospect...  We'd like to acquire the property by making a cash offer of $50,000 (willing to negotiate up to asking price, if after inspection Chris agrees with my rehab estimate), make quick improvements to the duplex, list both sides of duplex as short-term rentals, and rehab the garage apartment for ******'s eventual habitation.  Similar properties in the area rent to travel nurses as well as AirBnb guests for an average of $80/night, and assuming we could achieve at least a conservative 30% occupancy rate through the first summer (continuing to market and build toward greater occupancy), we would go that route.  Then after holding it for one year, ****** would like to purchase it as his primary residence and first investment property.  He would live in the garage apartment, manage and maintain the duplex, and continue his job and computer courses.  By that time, he will have two years' worth of tax returns showing consistent W2 income as well as a healthy credit score and would possibly qualify for an FHA loan with a low down payment.  (That being said, ****** is such a healthy saver that he actually will have accumulated enough cash to close a conventional loan as well.)  At that point we would use the income from the transaction to pay off our investors and have seed equity for our next project.
• 
• If ****** changes his course for some reason, it would obviously be profitable for Chris and me to hold the property and either continue with that short-term rental model or transition to a rental with traditional tenants on a one-year lease, if we aren't experiencing the occupancy rate that we're hoping for in the short-term model.  At that one year mark, we could cash-out refinance the property against an anticipated ARV of $150K-$180K, repay our investors, and have seed equity for the next project.
• 
• If for any reason we determine that it is not profitable to hold the property or if the market is more favorable for a flip, we could simply sell it in its improved condition, pay our investors, and move along to the next project.

I'm not entirely knowledgeable about how to structure a real estate deal that involves a capital partner, but Chris and I would be amenable to either borrowing the purchase price from y'all, funding the rehab ourselves, and repaying the loan at an agreed-upon interest rate after our sale/refi in 12-18 months, OR we could negotiate a profit-sharing agreement that benefits you similarly to your other investments.  Of course we would be willing to hold a proper closing with our real estate attorney (or yours) with all monies properly escrowed or exchanged, a deed of trust recorded, and a promissory note executed.  We would also be willing to allow y'all to have the first deed of trust on the property.  Let me know your thoughts if you want to continue the conversation!  I'm going to attach a rental analysis report containing details I'll outline below.  This is of course a rough estimate, but for now I'll plug in the figures I have.  Chris doesn't have the margin in his schedule to view the property until February 27, but I plugged the repairs I saw into a rehab calculator and added plenty of cushion to make up for my lack of expertise there.  Chris will complete a detailed bid for the renovation when he goes next weekend.

I ran the rental analysis report based upon the following figures (which can be amended and rerun after our negotiations and a more accurate rehab estimate):

• purchase price of $50,000
• rehab estimate of $30,000
• occupancy estimate of $1600/month
• no vacancy rate accounted for, as I projected a 30% occupancy rate based upon our first model
• no variable expenses accounted for in first year, as I included those in the rehab budget

I'm going to go ahead and run/attach a second report with a scenario based upon a $65,000 purchase price in case our initial offer is not accepted.  I've really never used this calculator with anything besides a traditional mortgage, so I'm not confident this is an accurate analysis, but we'll just start there.We're open to discussion about the amount y'all are comfortable putting up as well as a fair interest rate for this type of short-term, "hard money" loan.  I plugged in these figures because we have to start somewhere!  ... personal details...

Thank you for considering our partnership.  We are most definitely open to *any* suggestions you have about the entire process.  We expect this to be the first (well, second counting our primary residence/flip property in ******) of many real estate investments, and we'd love to make as few errors as possible!!

Many blessings to you both,

Kristin and Chris

Experts ~ what am I missing?  Any more suggestions?  My husband and I will be FaceTiming them tomorrow afternoon to discuss further.  (They live in Texas and have had their power/water knocked out all week, so we're just now able to connect with them.)  Do you have an questions I should add to my list?

Kristin McPherson · Answer

If anyone is perusing this thread in the future with a similar question, this article has helpful info about the structure of private money deals:https://www.biggerpockets.com/...

Kristin McPherson · Answer

My aunt feels safe with the transaction and trusts all of us.  I'm just not sure logistically how to approach this type of transaction because we've never brought in a partner before.

David Avery · Answer

Once I bought a house for $14,000.  My father whom is a Real Estate Broker approached the family and told him that the property would have at least $20,000 of work and product put in the house within 20 days.  It had a fire and lose of life of the sellers.  My father told the seller that his son didn't have all the funds to buy it and work on it.  So I bought it for  $1. and to have the remaining $13,999 be given to him within 90 days or due on sale which ever came first.

Get creative with you thoughts that the Aunt needs to hear, to feel protected.

Is your son handy with his hands ? Does the Aunt have a close connection with your son?

All of these things will l go into play on your decision, and approach to her.  Maybe your son needs to pay market price for the unit when finished.   Maybe he can be paid hourly towards equity or down payment on said unit.

I have done several  creative partnerships because I love to work and am good with my hands.

Be creative. and good luck,  I would not gut the triplex,  I have never gutted a property of 2700 Flips!!

Plumbers and Electricians charge almost 1/3 for new construction than existing.  Maybe your son has experience in either field?!

It cheaper to build new on bare land!!