Free and Clear Multifamily partnership advice

[Jordan Naeem]

Hello everyone,

I'm a newer investor and looking for a little advice for a potential partnership and multifamily investment. I'll try to give as much detail as possible so sorry if this is a little long-winded.

I have two potential partners who are looking to do a deal together to buy a 2-4 unit in Cleveland (B neighborhood or higher) where I am located. They want to buy the property in outright in cash and as of right now have no intentions to cash out refinance after stabilizing. They would each be putting in 200k each and I would be putting in 100k and would be responsible for all the property management, being paid by the other two on an hourly rate when responding to issues. The equity and profit would all be split based on money put into the deal, so I would have 20% equity and would be entitled to 20% off the net profit.

Here is my issue: both of them are pretty set on holding the property free and clear (10+ years) because their primary goal is solid cash flow and secondary income to their businesses which can be seasonal. My issue is that it would take me another couple year to regenerate the capital that will be tied up in any potential property with a not great cash on cash return, and I know a lot of the power of real estate comes from leverage and loan paydown. So my question is, are there any creative ways to make this work for everyone so they can generate their cash flow free and clear while I am able to have a better cash on cash return and have additional capital to deploy later? Or am I better off just having the lower return and not trying to get cute with it?

One piece of important context: Both my wife and I are early 30s and have good paying W2 careers. My wife is more of the traditional W2 worker who just invests in her 401k and thinks real estate is risky. We rent out our previous home and bring in $600 a month on it after mortgage, taxes, and insurance, but she doesn't see it as an investment property and so it has been hard to continue investing without her support. She knows and trusts the two potential partners so she has finally gotten on board with doing this deal -- so I'm wondering if having a low cash on cash and depleting my investment reserves is worth it to get her on board the real estate journey and have her contribute capital to be able to scale faster with her help later on.

Any advice is appreciated. Thank you!

[Nathan Gesner]

Quote from @Jordan Naeem:

This is a tough situation.

You may understand the value of leverage, but your wife doesn't. The only way you can demonstrate the power is through education or experience, and it doesn't sound like she wants to give it a shot. Is she willing to read a book or watch a video to gain a better understanding?

I like the Unofficial Guide to Real Estate Investing. Here's a fundamental explanation to get your juices flowing:

Assume a house costs $200,000 and rents for $1,500. The market appreciates 3% per year.

Pay cash for one house and rent it for $1,500. After five years you'll have earned $90,000 in rent income and gained $34,000 in appreciation.

Buy four houses with $50,000 down on each. The mortgage payment is $1,000 on each house, so you earn $500 per house or $2,000 monthly. After five years, you'll earn $120,000 in rent income and $136,000 in appreciation. You've earned $132,000 more by splitting your money and leveraging it.