Partnership idea - viable?

[Brandon Turner]

Hey, I've been working on a strategy to get some more properties under my belt, and wondering what you guys think of it. Am I giving away too much? Not enough? Wasting time?

Basically, my plan is based on three premises:
1.) I don't want to flip with Hard Money (Been there, done that, not real good to sell now)
2.) I want cashflow, at least $100 per unit
3.) I cannot get any more mortgages (Too much property debt, not enough "income", and too many deductions to use my cashflow as income)

So, my idea is not a new one, I'm sure. Basically, I would find (advertise, friends, etc) partners to purchase properties with. I would find the property (single fams, small multifamilies), research loan options, put the deal together, arrange for any repair work (not physically do the labor - been there, done that - too tired), and manage the property from start to finish (3-7 year timeframe, or whenever the market improved). Basically, I would do 100% of the deal. The Partner would do one thing - get a mortgage because they have a down payment and the ability to get the mortgage. Typical sale price would be $50k - $150k, with 25% down.

We would split cashflow down the middle, as well as future profit after the sale. 50/50.

I would also require the partner to come with an extra $3000-$5000 at closing to put into an escrow account for those emergencies (tenants destroy stuff, etc), as a hedge against a ruined partnership the first time something major comes up. It would already be paid for.

Furthermore, would it be appropriate to collect a small ($1000 - $2000) fee, upfront at closing to pay me for the work to do all this? That would get me a bit of income for putting this all together. Is that too tacky to ask for?

Anyways, this ended up being much longer than I hoped, so if you are still reading, thank you! Let me know if you think this is viable, profitable, or whatever. Thanks!

[Jon Holdman]

There's a HUGE difference between what your friend is doing, Andrew, and what Brandon is proposing. That is that your friend's investors aren't on the hook for a loan. Their cash is at risk, like Brandon's investor's cash. But that's all. Brandon's investor is also at risk of actually having to cough up more cash to get out of the deal if it goes bad.

I'll look at this from the perspective of a potential investor. I get to put in a down payment on a house, fund the rehab (not mentioned, but probably inevitable), provide the reserve fund and pay a $1000-2000 fee. I get to take responsibility for a loan. For that I get half the cash flow from the house and half the profit when it sells.

Its a little tough to evaluate without specific numbers, so let me make some up. Assume a sales price of $100,000 (middle of your range, Brandon.) I'll assume rent is $1500 a month. Assume zero rehab.

If I put 25% down and get a 30 year, 5% loan I have P&I payments of $402.62. Using a PM and just assuming the 50% rule, I have NOI of $750 a month cash flow after the debt service of $347.38 a month. That's $4,168.61 a year which gives me a 17% cash on cash return.

Now, I do have to find the deal and find a PM.

If I go with your deal, Brandon, I don't have to do either of those things. You bring me the deal. I do have put put in $5000 for cash reserves and $2000 for your fee, which bumps up my total investment to $32,000. Since you're doing all the management, I'll assume only 35% for all (other) expenses. That leaves $572.38 a month in cash flow, which we split 50/50. That gives me $286.19 a month, $3434.30 a year. On my $32,000 investment, I'm getting 11%.

When I sell the house I bought directly, I get all the profit, assuming there is one. In the deal with you, I get only 50% of the profit. Would you pay me 50% of the loss, if we end up with a loss? Given the costs involved with buying and selling, we need consistent 2% annual appreciation for five years just to be break even.

If the expenses are higher or rents are lower, will you continue to manage it at no charge? For how long? I don't see you have any skin in the game at all. You're getting the upside, but there is no downside for you if things turn sour. If there is no cash flow and there a profit on the sale looks unlikely, you walk away unscathed.

Yes, I do see some value here. I don't have to find the deal or find a PM or deal with the PM. I do have to deal with you, though. And, for all intents and purposes you are acting as the PM.