Is this a viable strategy?

Question

A friend and I are both looking at starting a partnership.  The idea is we would split a 20% down payment and then after closing, his parents would cash us out and get either 20% equity or no equity but a great guaranteed interest rate.  This way we would be able to scale infinitely just like the BRRRR method.  However, we could do it on any property does not need to be a big rehab project.  Also less dealing with banks and no appraisal risk.  Would this work?  What would the best way be to execute something along these lines?  Thanks in advance for any advice!

Wayne Brooks · Answer

You’re going to be putting down more than 20% on investment properties, plus closing costs.

You and your partner’s income will have be sufficient to qualify for the 75% or so mortgages.

It will be extremely difficult to break even cash flow with 100% financing unless you are buying really well.

Part of the reason the brrr works, when it works, is because you have to have a really good deal to begin with, in order to refinance out all your costs and Still have your loan at 76% of value, not at 100% of value.

You Will need some reserve cash for unexpected repairs, vacancies, etc.

Don Konipol · Answer

@Andrew Rudahl

The key is knowledge and experience.  Without those two success will probably be an illusion.  With those two building a real estate empire, or at least wealth, is possible.

Most inexperienced potential real estate operators vastly underestimate the amount of knowledge and experience necessary for success, and the time it takes to gain these attributes.

Some are able to utilize formal education to shorten the time frame, some utilize experience investing and operating small deals, and others go to work for a large real estate operating company until experienced enough to go out on there own.

Although real property investing lends itself well to leveraging through borrowed money, or through passive equity investments of others, it’s not easy to find and close on properties at a purchase price significantly below market value.  While purchases at large discounts do occur, the competition for these properties is fierce, and many if not most change hands quickly in all cash transactions.  Further, these opportunities typically occur under the radar, where a buyer has spent a lot of time and money developing sources and one of these sources has paid off.  I can tell you that any property marketed in a public domain as “below market” isn’t.

Many successful investors are able to see what a property can be rather than what it is.  By purchasing at market value, and repositioning that property (usually includes altering the improvements at sometimes great cost) these investors may be able to tremendously increase the property value.  Other successful investors are able to determine which markets will show big future increases in values and invest early and “ride the wave”.  Some just invest for a little cash flow, and let price appreciation, amortization, tax deferred cash flow, and inflation increase their wealth.

Jay Hinrichs · Answer

as stated above not only do U have partnership issues .. but 100% finance on rentals is a slow death unless your able to routinely buy FAR under market.. and it can be done but hard to scale as there is a lot of competition for those assets..

Don Konipol · Answer

@Andrew Rudahl

Investment and business partnerships, while seeming to offer solutions to entry while being discussed over a few beers and euphoria is high,  are full of pitfalls and problems, usually severe once the first property is purchased.  One or both sides usually end up feeling that they are contributing too much and receiving too little.  Depending on the personalities involved, both parties may be passive aggressive and knowingly or unknowingly sabotage the investment.  The best case scenario is often a partnership buyout.

Most partnerships that are structured with both or all parties having management responsibility and a say in the operations will not end up a happy experience.  Professional partnerships, what used to be structured as limited partnerships, with strong operating. Agreements, drawing a thick line between the operating partner and the passive (no voice in the decisions) investors can be very successful.  But one can be successful as operating partner in these scenarios only after much education, knowledge and experience.

If you have $20k to invest and little expertise, you can own 100% of a property that has $20k in equity.  If you partner with someone else, you can own 50% of a property (properties) that have $40k in equity.  Or 25% of a property that has $80k equity.  So, aside from maybe diversification, what have you accomplished?

The only way to benefit is for somebody else to be willing to provide cash or credit and allow you ownership interest for your expertise.  If you have little expertise, track record, etc., you’d have a hard time putting something like this together.  And if you were able to defy the odds and put it together, the cash investor would probably want the ability to get control of the property should projected targets not be met.  IMO there is no good reason in your scenario to complicate an investment with a potentially explosive structure.

Mike McCarthy · Answer

i think I understand that family would provide the 20% down payment, and you’d get an 80% mortgage on houses you buy.

There’s no real issue with this from a RE perspective. You could even get the 20% gift up-front as long as it’s more than 2 months before you start applying for a loan. The bank wants to see that it’s been in your account for at least 60 days.

You want to look into the IRS rules on monetary gifts though. There are rules and taxes that may need to be taken into account (which I’m not familiar enough with to share).

Andrew Rudahl · Answer

Lots of interesting replies.  Seems if you watch Bigger Pockets podcasts or Rich Dad Poor Dad they suggest it's possible to use "OPM" (Other Peoples Money) to find plenty of deals and scale a real estate empire.  I'm trying to determine a strategy to do this and think through it before executing.  This thread has put a fair amount of cynicism on that notion, or at least this proposed strategy.  I'm still learning, not quite sure what to believe at this point, but super motivated so going to keep researching strategies.  Perhaps a different strategy makes more sense.

Joe Villeneuve · Answer

So you're forming a partnership with your friend in order to gain access to his parents money?

Andrew Rudahl · Answer

@Mike McCarthy. Ok great.  Yeah good points and I will do some research on the tax implications.

Andrew Rudahl · Answer

@Joe Villeneuve Biggest reason is I only have say 20-40k total I want / can invest.  But, I don’t want to only be able to buy 1 property, I want to buy say 100 properties.  If partners have extra capital it can allow me to scale exponentially it would seem?

Joe Villeneuve · Answer

My first question is this.  "What reason(s) are behind your decision to form this partnership"?

Is this a viable strategy?

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