PLEASE SEND HELP!!!!!!!!!!!!!!!

[Jordan Sutherland]

This is the third time, I've posted this thread. The first two times, I never got a single reply. Come on BP, you're letting me down right now!  Please give me 2 minutes of your time to answer a debatable question for me, PLEASE!!                                      Hey guys, I'm fairly new to real estate investing. I own 3 residential units and am looking to purchase a couple more units this year. I've been inspired by so many people on BP, and I want to safely expand my portfolio rapidly over the next few years. I've seen some very creative ideas and it got me thinking. I have a wealthy family friend that has financed my rentals and he is willing to finance more in the future. Like I said, I want to grow rapidly, and I think finding a way to purchase a small apartment building might be a good way to do that. The only thing is, I don't have the money for such a large purchase. I'm thinking about asking my friend to go in on a deal with me, and I want the terms to be very favorable to me, while still being lucrative for my friend as well. So here's my idea: my friend and I purchase a small apartment building for somewhere around $400,000-$1,000,000, that has around a 8-10% cap rate. Together, we put 25% down and finance the rest through a bank on something like a 20 year note. I want to only be personally responsible for a quarter of the down payment (25% of 25%), while my friend pays the remaining 75% of the down payment. I'm a licensed Realtor and my family owns a property management company. I would do all the work to find the right deal, and I would be responsible for management of the property. I would only want to do this on a property that I know we're getting a great deal on. I would want 50% ownership in the property, and 50% of the cashflow , after we have a good amount of reserves set aside. My friends initial monetary investment will be 3X what mine is, but it will be completely passive for him. He is a very wealthy man, is not greedy whatsoever, and is perfectly content with a fairly small ROI (4%-8%) , on passive investments that he views as safe. Would my small down payment and "sweat equity" be worth 50%, or am i just dreaming? I would love to hear your opinions!! Thank you for taking the time to read my post and any creative ideas or suggestions will be greatly appreciated!

[Linda Weygant]

You'd have to make sure your friend is ok with this diluted investment. He's only getting 2/3 of the value of his investment, so that 8-10% cap rate becomes 5.4 - 6.67% cap rate for him. He can get a better ROI in an S&P fund and if you brought this deal to me, I'd tell you to try again. Your sweat is worth something, but I don't know that it's worth 25%.

I'd structure it more like this:

You put in 25%, he puts in 75%.  You each get 25/75 of cash flows and ownership at the outset. 

However, you get a "commission" for finding the deal up front.  So maybe that's worth 3% as that is what a traditional broker commission would be.  So now you get 28% of cash flows and 28% of ownership.  I would leave the ownership percentage as 28/72 for 25/75 contribution.

Then I'd figure out what property management is worth in your area.  Here it would be something on the order of 8%.  So you would get 8% of rental income first, then distribute profits at the 28/72 percentage.

So let's say you charge 1000 of rent and, after expenses, there's $150 to distribute.

You get $80 for your management fee and $42 as your ownership percentage.  Your friend gets $108.

Later when you sell, say you profit 30,000 on the sale of the building.  You get $8400, $7500 of which is for your portion of the investment and $900 for having found the deal in the first place.

When I was negotiating a similar deal, my partners gave me an additional 10% of equity because not only was I finding the deal and managing the property, I also was to manage a major rehab as well.