Partner deal (low money down) for starter - advice?

Question

Hi BP!

I would like to tap into your collective knowledge to help me make a good decision.

I'm 23 years old, wanting to get started in real-estate (long term buy and hold) but don't have enough saved down for a 30% down payment (required in The Netherlands). However the real estate market is recovering from a recession in the last couple of years and rents are inflating even faster than property value. It seems like a good moment to get into the market now (although I'm already exposed to appreciation through my residential property I would like to add another one as a rental).

I found a partner with money and a lot of real estate experience in the UK that is willing to invest in The Netherlands with me. I know him through work, we're both consulting to the same client/project and therefore work together a lot.

The deal we came up with is the following:

• We divide the ownership 1/3 for me and 2/3 for him (both ownership, appreciation, cash flow, mortgage etc)
• He will put down 60% on his 2/3rd of the mortgage, thereby allowing me to put down only 10% on my 1/3rd
• The price for this is my "sweat equity" by doing all the work regarding the acquisition of the property, sorting out the mortgage etc.
• We will look for a 40-50 sq. meter studio and convert that into a 1-bedroom apartment to add value (in Utrecht comparable sized 1-bedrooms are more expensive than studios)
• We'll rent it out, split all costs and profits according to the 1/3 and 2/3 ownership
• After a few years we refinance (when there's enough capital in the property by adding the bedroom plus hopefully appreciation), and that's where he pulls out all his initial capital plus some (effectively going from 60% to 70% LTV and upping the mortgage), and I will pull out a little bit of capital because I will go from a 90% to a 70% LTV.
• I will be doing the property management, for which I'm getting paid (we work out the going rate, and he will pay me 2/3rds of that monthly rate out of his cash flow so effectively we're both paying according to the partnership split but I'm receiving the money)
• I will be able to tap into his experience and knowledge with a small amount of money into the deal during the start.

How does this sound to you guys? Any red flags I need to take care of, or tips/tricks? I hope we can discuss this in depth :)

Thanks in advance!

Cheers,

Bas

Bas Land · Answer

Hi Sam,

Thanks for your reply. I was reading it, re-read my original post and thought yep this guys is right. I did mess up my numbers. They should be as follows:

• We divide the ownership 1/3 for me and 2/3 for him (both value, appreciation, cash flow, mortgage etc)
• He will put a down payment of 40% on his 2/3rd of the mortgage, thereby allowing me to put down only 10% on my 1/3rd. Therefore the total down payment will be 70% (trust me the math here works).

This means I will be more leveraged, and he will be "carrying" me for part of the down payment for a few years. The calculation is not by any means harder or easier when going 50/50 or 33/67 I guess. I'm pretty good with Excel (data professional) so the math does work.

Your recommendation on getting everything in writing is a very good one, thanks! Do you advice to just sign a document between the two of us, or get it legalised through a notary? It may cost us a couple hundred euros but I will be fine paying that if it gives more protections and clarity, and I'm not sure it does.

Thanks for the advice anyways! I really appreciate it when more experienced people look after the new ones!

Bas Land · Answer

Excuse me, in point 2 above the total equity will be 70% of course, the down payment will be 30%. Need to stop doing three things at once...

Sam LLoyd · Answer

First, your numbers are hard to understand... I can't tell if you're talking about % of value or % of down payment.

My recommendation to simplify things is to go 50/50 equity, but he puts 20% downpayment and you put 10%... with your management making your value into the property equal.... split income, split costs, split profit at sale... more simple numbers.

Next recommendation is to get everything in writing, especially as this may be required for tax purposes. I have a very negative experience with partnerships, but I know they can work for the right people with the right agreement.

Partner deal (low money down) for starter - advice?

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