Working with a partner. Does it matter if he brings cash or a mortgage?

Question

I approached a friend about partnering on an investment.
Basic terms are that he puts down the whole payment, gets 50% of income off the top, no other expenses, and on resale, he gets the original investment back first. I am responsible for all management, taxes, insurance, repairs. Upon a sale, after his original investment, I get money back for repairs/improvements. We split the remainder 50/50.

It makes clear sense when buying the home in cash and under an LLC.
What happens if he were to get a mortgage on the home? 
I recommended that we try and get him a mortgage on the purchase so his returns can be higher on his cash invested.

What should I know about the deal if he were to get a mortgage? I assume he would then have to buy the house in his name, and then transfer the home into the LLC, which has some costs associated to it. I wont be able to qualify for a mortgage, so co-signing is not an option.

Should the terms of the deal change if he were to get a mortgage on the purchase?

Angel Perez · Answer

Hey Ben Bakhshi. Arthur Garcia pretty much covered everything.

I just wanted to add that probably the easiest way to approach this is to have your partner secure the finance but instruct escrow that title will be taken under the LLC. That way there is no added expense or headaches and it is taken care of on your purchase and not as a secondary recording.

Michael Quarles · Answer

i think the Money is too expensive.  Unless there isn't other money available
I've always figured 1/3 1/3 1/3.  One for money one for finding the deal and one for doing the deal.

And the money third is independant of their money cost. As is the third for finding the deal.

Ben Bakhshi · Answer

Angel Perez & Arthur Garcia
Where can I learn about specific instructions that I should follow? What exactly should I have in my Joint Venture contract? These deals are with friends, so it would be reasonable for me to write up the contract by hand in 1-2 pages rather than pay a lawyer for a headache.

If the lender decided to foreclose on the property and we are in a JV, I would be at risk for losing my side of the business:
* Do you think I should get a higher percentage of the income if the investor brings a mortgage into the deal? ie. 50/50 split of revenue if they bring cash, and 40/60 split if they bring a mortgage?

The investor's ROI would skyrocket if they brought a mortgage, so they wouldn't have a big problem with this on paper, so long as I had a just reason.

Arthur Garcia · Answer

Hey Ben,

First off, congrats for getting 50% of the deal done.  Finding money is always a tough component in any deal.

If you want to structure this deal with a conventional mortgage here are few ways to do it.  First, make sure you have full-proof JV contract associated with this deal.  You want to make sure the terms and responsibilities are clear.  You'll also want a few options built into the contract in case things don't work out.  Like every 4 years hold the option to renew the agreement so that if things aren't working out, you can both exit.

Secondly, you don't need to qualify for the mortgage, only he does.  He can add you to title after escrow closes (perfectly legal and OK).  ANother option is to put the home in a trust making you and your partner the beneficiaries.

If you go with conventional financing you'll have to talk to your lender about LLCs.  If they are allowed, you'll have to put the property in an LLC after the deal closes.  Lenders don't like making mortgages to LLCs, only people ;)

I hope that helps!

AG

Ben Bakhshi · Answer

Michael Quarles 1/3 of what, The total monthly profits and appreciation? That's what you give someone for finding the deal? What happened to a 5-10% finders fee.

The way the deal stands, the investor would be making about 13% returns. Technically, it would make more sense to find a hard money lender and pay him 8-12%, but then there would be points involved and a down-payment, so that doesn't really vibe with our plan to put 0 money down.

Our gross profit after taxes, insurance, and PM, will be about $300 a month, which we'll need to save up for repairs.
Since repairs are reimbursed on the sale, our actual monthly return is about $300 a month, which I think is fair for no money down.

There is a chance of flipping this house within a year, but we'll see where the market takes us.

Ben Bakhshi · Answer

Thanks for the tips Angel Perez and Arthur Garcia.
Regarding the contract length, since you brought it up. 
We were already planning to review the deal after 5 years.
If we were to hold it indefinitely, is it fair for me to keep paying the expenses? Or is there a tipping point when that should also be 50/50. ie. When the investor gets back 50% or 100% of his investment back.

Working with a partner. Does it matter if he brings cash or a mortgage?

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