How can I (or should I) finance my half of a $25k buy and hold?

Question

First off- I'm new(er) to BP but have been obsessing about REI for a few months now. I listen to podcasts everyday on my way to work and have been steadily analyzing deals for a week now. I'm still green to this and aside from owning my own home now for 13+ years, I'm ready to put some skin in the game. That being said, here's where I'm at:

Father-in-law owns several (maybe 4 or 5) C+ properties in Cincinnati that he rents for around $600/month. He acquires them slowly and pays all cash averaging $20k a piece. He has developed his own strategy and niche over the years and if you know people from the west side of Cincinnati, you know you can't question nor offer to change or broaden their way of thinking. I won't go further into it just incase he finally does decide to become a BP member someday and stumbles across this post. So here's the nitty gritty:

There's a property in his farm (where he owns 3 houses on the same street) that the absentee owner has offered to sell him for $20k. Looking at the numbers, it needs roughly $5-8k in repairs where he would then be able to rent out for approx. $600/month. Using the analyzer on BP, I estimate it can cashflow around $275 to $300/month. My father-in-law and I are discussing a JV where we each come up with $12 to $15k a piece. He would pay all cash for his half. I have the cash but don't want to tie it all up just to earn what I estimate would be $100 or so a month in cashflow (after overhead/capex/vacancy and paying my partner a little to manage the property since I'm out of state). I would rather finance my end of the deal to keep my cash in pocket and still create some positive cashflow. My question is HOW/Should/COULD I do this?

Go easy on me now. I'm new to this and I'm open to all of the education I can get! Thanks all.

Rick Pozos · Answer

There are more creative ways to create cash flow, but you dont know them or you have not tried them. PUT THE CASH DOWN ON THE DEAL. It will bring you closer to someone who has been in the game for a while. It will show that you are serious. You will learn so much actually doing something instead of just reading and listening to podcasts.

Obviously you have good credit. If you have an emergency, you can get a 10k credit card with no interest for a year to pay for the emergency.

If you put the cash out, how long will it take you to save up the money again?? Maybe a year, year and a half. Not too bad. BUT you will have to stop going to eat out as much, not as many starbucks trips, no new car this year, dont buy those new clothes. Suck it up a little and you can have a free and clear house with someone that knows what he is doing.

Also, you just planted a money tree. Yes it does grow on trees. YOu just have to sacrifice (oops said the word every American hates) a little to care for your money tree and then it will take care of you for a long time.

Nick Mcgowan · Answer

Thanks everyone for the great feedback so far. It goes without saying how valuable this site has proven to be.

@Josh Mitchell, that's certainly an option I might consider if my FIL is up for it. I have about $30k in liquid cash and, as you can see, I don't want to tie half of it up if there are more creative ways to cashflow.

@Marcus Johnson, the $100/month was what I factored I could conservatively cashflow after all the overhead (Capex, utilities, taxes, misc) was paid- which also includes a little extra each month for my FIL/partner who successfully manages all his current properties on his own.

@Eddie T., a MFR is my next goal which is why I don't want to tie up all of my cash. But this deal is on the table at the moment. I am most certainly committed to investing but just doing it judiciously since it's my first real deal. Tying up half of my cash when it would take over a decade to recoup doesn't seem to make much sense to me if there are other means to do so.  Ideally, I'd like to structure the deal to where I can just collect the, albeit small, monthly portion of $100 without ever really having to do much more (aside from the necessary requirements of an out-of-state landlord). If I can find a way to finance my portion of the deal and still cashflow, that's one heck of a COC return right?

@Jacob Pereira, you are right in that the education/experience is what I stand to gain the most here. Heck, I'm already learning a ton on just going over the hypothetical with you all which is really exciting for me! Are there HELOCs available for LTVs of say 85%?

Jacob Pereira · Answer

@Marcus Johnson and @Eddie T.,

Presumably he's already factored repairs into his equation; he mentioned cash flow after CAPEX, OPEX, etc., so provided he made good estimates there, he should be good.

I know small, cheap homes get a lot of hate on this site, and, full disclosure, I've never bought one below $170k before, but I think this could be a great way to get your foot in the door. Try for a HELOC if you can, but otherwise just bite the bullet and put your cash in. It's not the best deal I've ever seen, and I guarantee you'll do more than $1,200 worth of annual work on it in the early years once you consider calling contractors, managing tenants, accounting, etc., but consider this part of your education.

Best case, you see a bit of appreciation as you get tax benefits and you can sell and move on to something bigger, comfortable in your newfound knowledge. At worst, you're out $15k and got a more valuable education than than that comparative art degree that your high school girlfriend ended up with.

Nick Mcgowan · Answer

Thanks @John Casmon.

John Casmon · Answer

@Nick Mcgowan What value do you bring to this deal? Margins are small and sounds like you all may not see eye to eye since you can't "change his way of thinking." Would be very hesitant on the overall partnership.With that said, I'd suggest you do the deal solo or have him finance it as a private lender and once you pay him the initial 50%, convert it to equity, but make him a limited partner.  Or put in a smaller amount and take less equity so you can learn on a real life investment if this is just intended to get your feet wet before jumping in. Either way, figure out what you want from this partnership and focus it on that. Otherwise, the holidays may get real tough.

Eddie T. · Answer

@Nick Mcgowan First off this deal is too small for two people you should either both buy a duplex for 40k and then you would be making 300-400 a month cash flow or i do not think you are ready to invest. You have an opportunity to start investing but you seem on the fence you do not want to use your own cash you do not seem fully committed. Like @Marcus Johnson what about the months something breaks and you need to put $1k - 2K back into the property are you ready to do that?

Josh Mitchell · Answer

@Nick Mcgowan could you give a portion of your share to your father- in - law, say 25% of the 50% you owe? Then tell him that he can keep all of the rent until your other 25% is paid for? This wouldn't provide you with instant cash flow, but it would allow you to not tie up all of your cash at this time, while in essence having the renter pay for your 25% owed.......

Nick Mcgowan · Answer

Thanks Jason. I will certainly look in to that.

How can I (or should I) finance my half of a $25k buy and hold?

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