How to structure a rental deal for a cash investor return?

Question

What is the structure for a cash investor on a rental deal for me to get the return on thier investment?

Daniel Dietz · Answer

@Curt Smith, we form an LLC for each investor that can then span properties with the same investor, but no 'mixed' LLCs where there is more than one silent investor.

We are 50-50 owners of the LLC. The Investor bring the 20% down and we both need to sign on the loan, so we are both on the hook so to speak. Everything is split 50-50, although I could see with the right investor maybe doing something different with the tax benefits on it.

We use a local/regional smaller bank that just lends here in WI. Our last one about a year ago we got 20% down, 5.25% locked for 10 years with a max 1% increase per year in years 11 and an overall max of 11.25 over the 25 year life of the loan.

I am working on figuring out how to do a couple of these just a 'partners' with an investor, meaning no LLC, so that we can tap into the 30 year 4% fixed rate loans.

Dan Dietz

Curt Smith · Answer

@Daniel Dietz  Great to hear.  Some details?   Who owns / buys the rental the money guy or you, the PM?   Then the debt follows the owner.  Good thing about portfolio/soft money lenders is that unlike FANNIE (bank) lenders they don't trace where the down payment (20-25%) comes from.  BUT they do need proof of funds from the borrowers bank account per my last portfolio loan.  If this is true for the lender you used, this means the cash guy needs to allow the buyer (you) to put the down payment into your bank account for the proof of funds statement.   Some lenders may find this risk disconcerting.

What portfolio / softmoney lenders have you used?   In atlanta there's a bunch, the bigger guys are Lima One.   Local loan brokers often have access to softmoney sources.

How do you paper this JV?  As a 2nd security deed or an un-filed JV agreement?

BTW it also sounds like tax benefits are also 50:50 split given everything else is split?

24% cash on cash in my view especially for rentals in WI a high local RE tax state would be surprising,,, and admirable!  :)

Daniel Dietz · Answer

We do our buy-n-hold rentals this way..... The Private Money Partner bring ALL of the down payment which is usually 20% on a commercial portfolio loan. We do ALL of the finding, rehab management if needed, finding funding, placing tenant and all ongoing PM and business management.

We split the cash flow 50-50 either quarterly or yearly. All equity growth will be split 50-50 at time of refinance or eventual sale at 10 or more years. We project that EACH of us should be able to make a 9-12% return on the initial equity. It seems to be a true win-win for all.

Dan Dietz

Curt Smith · Answer

I'll assume your role is buyer / investor, the cash investor is the lender, possibly equity investor.

You may be asking blue sky?  But it boils down to what would entice a cash investor?  Cash rules.  For a flip its easier split is 50:50 at the closing table.   But for a rental there is no closing table for the sale.  Ideally rentals are held forever.

Pure debt scenario;   cash guy makes a loan to you for purchase plus rehab at some fixed interest (4% to 8% you have to work this out) for some ammortization period (10yr to 30yr) with or without a baloon.  Baloons in deals like this are either suddent death, you are forced to sell if you can't REFI out into a bank loan or???   So Baloons are not to be taken lightly, even baloons that are 10yrs out.  Hopefully within 10 yrs you can REFI into a bank loan.

The above is packaged up into a Security Deed, some states call these a Mortgage, every closing attorney / title office can create the note and mortgage containing what ever you agreed to, wrote up, signed, gave to the closers.

A mix of debt and equity.  This is complicated, forces a sale OR the investor has no time horizon and will stay in the deal for a long time till sale.   Same issue re interest rate, term etc, now maybe a capital gains split upon sale.  More creatively you can agree to a split of the tax benefits (depreciation, percent of rent) going to the lenders 1040.  I'd stay away from this complication, although its a one liner in the mortgage:  "lender is due NN% of the tax benefits both depreciation and income to his entity or personal tax return".

Between 2 people there's no limit to the creativity.  But a pure debt scenario is easiest.  But potentially least interesting to a sophisticated lender.  For a lender who is used to CD rates of return (Aunt Milly) you might offer 4-6% and they'd be happy.   Its the baloon issue (or not), the ammortization period (I suggest no shorter then 25 yr to keep your P&I payments down).

Eric Telese · Answer

I am also wondering the same thing for a deal I am looking at. I want to partner with someone who can bring the down payment to the table.

Not sure if I should offer 50% of the deal and I will be responsible for managing the property, or If I should borrow the money and pay it back with agreed upon terms.

Rene D. · Answer

@Daniel Dietz can you both take the loan out and draft a partnership agreement or JV?

James Pennington · Answer

@Curt Smith.  Great input! Thanks for the response.

How to structure a rental deal for a cash investor return?

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