Accounting NERDS! Help! :)

[Account Closed]

I mean the nerd term affectionately. I say it with pure humor and respect for math way over my head. Help with the below...

The idea of someone investing in my property investing came up. Although in this case it is a relative, let's not focus there because it will be a business relationship. They don't want to become investors like us weirdo's on BiggerPockets, but I think they want to try to dip their toes in and see if anything bites their feet off.

Hypothetical scenario, please comment freely.

Someone offers to invest in a BRRRR that I have lined up. They give 5K which is 10% of of the 50K house I buy with cash. So (sorry for the Kindergarten math) they're in for 5K and I'm in for 45K. Investor puts a lien on my title.

We do 15K in reno that I pay for.

We get a tenant, paying 1K a month rent. I'll use round numbers to make the math easier for me.

We can refinance at 6 months, for 75% of the ARV.

ARV is 125,000. Yeah I know fantasy land, keep reading.

Cash out REFI is 93,750

I get my 45K back because I said so.

Dude get's his 5K back.
I get my 15K in reno costs back.

I realize I haven't discussed operating costs while unoccupied, just consider that in the reno costs.

That leaves 28,750 on the table.

Investor get's 10% of that right? So, 2875?

He/she also gets 10% of the monthly profit. So if the rent is 1K, and the note is 650, he/she gets 10% of the 350 profit (I know I forgot vacancy, CAPEX, etc assume that's in the 650) which is 35 a month.

What is the value of this investors interest? Is that the right term?

If I want to buy him out????

Is it 10% of the appraised value to buy out their interest?

On month 1, there's 31,250 in equity fair market, do I just buy out ten percent of that part?

The part that really made me cringe, what if after five years (est) they want to be bought out. Accounting practices say the value of an item is its value at purchase until you are selling. So dude or dudette wants me to buy them out, do I use the purchase price?

Make them pay for a current inspection, and then use that price?

Make them pay for a current inspection, and then offer them less than their share of the current value in an attempt to negotiate the best value for myself?

Clearly the person initiating the buy out is paying for the inspection...IMO.

Educate me oh accounting nerds. :P

Am I way wrong here?

Now that I've written all of that. It's a relative, well an In-Law for me, who wants in...they have nothing...this would be like, be their shot out of minimum wage forever kind of stuff. The catch is that they'd have little to no say at the beginning. The idea is that, my wife can throw her little brother a bone, without....hmmm....putting us at risk.

Discuss...I'm looking for all the differing strategies here, but please understand that there won't be any family favors going...it's business.

Thanks team!

[Derek Tellier]

@Account Closed

So I'm not very educated/experienced here, which may be a good thing in this case, but why not just ask him to loan you the 5K? 

Offer him 10% interest, you pay him the interest only and then balloon him back his 5K when you refi? 
In that case his $5K is earning him $50/month for 6 months and then he gets his $5K back, he earned $250 or 5% in 6 months on his $5K, that's better than anywhere else he could have put that money. 

If you want to be more generous offer him and even better rate. Just know that during that period you'll have to account for that $ as an extra expense coming out of your cash flow.