How to structure small multifamily (2-4 unit) partner deal?

Question

What are the ways in which a deal can be structured to be beneficial for both parties in the following situation:

I am interested in and have the capability to find a small multifamily (2-4 units) property in Georgia that will cash flow quite well. I would source my own off-market leads and would lock the property down at a price that would yield upwards to 15% CoC. If someone else (Family, friend, investor) were to put up the full down payment for an owner-occupied friendly mortgage (I would live in said property, say FHA 3.5% DP), what are the ways in which that person could benefit or be paid back? How do I structure a deal that would actually be worthwhile for them and not just them essentially loaning me the money?

Thanks in Advance

Jacob St. Martin · Answer

Hello Patrick, this is a great question and I am looking to do similar deals but with STRs. The way I am pitching this to investors is that the cash partner provides 100% of the cash needed while you (the sweat partner) manage the property, allow them to get the low down payment and interest rate that comes with a primary residence loan, and make it 100% passive for them. Additionally, they will keep 100% of the cashflow until you have paid them back for 50% of their investment. So if it cash flows 500 a month,250 is theirs and the other 250 is yours but goes to them until you have paid back 50% of their initial investment. Once you have hit this 50% mark then you are 50/50 partners.

Jacob St. Martin · Answer

Yes you would want to set up a joint venture agreement detailing the terms of the agreement and what to do in each scenario. This would dictate the ownership percentage of everything as well.

Steve Vaughan · Answer

When you show a lender 3 months of bank statements to qualify for the mortgage,  the funds need to be in your account the whole time.

Steve Vaughan · Answer

I or others like me would like to be able to assist with a reasonable rate of return expectation, but it's the seasoning period the borrower/buyer (you) must have the funds in your bank account that gets me.  This can be 3+ months plus an explanation for the source of funds, which can't be borrowed.

Figure out how to collateralize or secure the funds for the 3 months pre-purchase and your chances of finding a partner will greatly increase👍

Rick Baggenstoss · Answer

@Jacob St. Martin. If they buy a $200k house, you'd be paying your partner 100% of $500/mo cashflow for 200 months?!  I don't think this works well for you.

If they buy a $200k house ($40k cash, $160k debt), then you should pay $300/mo, then 50% of everything above that.  You or someone should still get some cash from hosting, set up/design, and/or property selection.   They get a reasonable return with upside.  You get paid for good work/upside.  Maybe everything about $800, you get to keep (excellent work).

Lastly, you should be able to buy each other out with 6 months notice.  You gotta plan possible exits.

Rick Baggenstoss · Answer

I have partnered several times with investors.  Clarifying the roles and contributions is essential.  I would mention the roles even if the contribution / pay for these roles is $0.   Over time, it shouldn't be $0.

For example, if you bring your partner a $200k house for $150k, will you get paid $0?  At some point, you'll stop bringing the deals because of the disincentive.

@Patrick Johnson you might want to clarify FHA rules.  The partner contribution may be an issue with this loan.  It will also have to be move-in ready (not much room to add value) and fiercely competitive.   You might want to adjust to 20% down payment from partner and decrease it if possible.

Jacob St. Martin · Answer

I am looking for single family with a basement or ADU ideally. I actually have a property lined up, I am just in search of an investor still.

Patrick Johnson · Answer

@Jacob St. Martin Thanks. I understand. Would you be the owner 100% on paper outright from the beginning? So I'm assuming there'd be a written agreement outlining this, and what happens once you become 50/50 partners depending on what everyone desires? As in, if they have no desire to be an owner, you could just continue the arrangement until you pay them back in full, plus a certain interest amount? Or if you decide to go short term rental on a unit or two which could create even larger profit margins maybe they'd want to stay in?

Jacob St. Martin · Answer

You wouldn't be paying them 500 a month for 200 months. In the scenario we were discussing it is a house hack partnership so they would be putting 3.5% down plus maybe 5k in reserves which is $12,000. In this scenario it is a repayment period of 2 years which is a lot more reasonable. I think that the structure you proposed is great too but as a beginner it can be very hard to get people to partner with you. For instance, would you do the deal you proposed with someone who has never owned or managed a property? I wouldn't do very many deals structured like this because after the first couple you should have enough experience to secure better partnership structures but I think sometimes you need to make sacrifices to get into the game.

How to structure small multifamily (2-4 unit) partner deal?

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