How Structure a Private equity Deal

Question

Hi BP family!

I have found a cash provider who will be bringing the money to the  table, down payment and the rehab costs. It will be a private equity deal. It will be my very first ever

The money available is 150K that this investor will obtain through an already approved loan with 0% interest. The idea is to use this money for multiple purchases of multi family but i really don’t know how to structure the deal with the cash provider also because the money will be from a loan that must be paid monthly.

Thanks for any help !

Dennis Cosgrave · Answer

I just finished reading the book, It's a Whole New Business! by Gene Trowbridge. It provides a detailed explanation of how to structure syndicated investment, whether it involves one or more partners. The big take away from this book is that you need a competent securities attorney and CPA to set up the best structure that suits your particular situation. I strongly recommend you read it. It will give you a much better appreciation of what you are dealing with.

Thomas Gonzalez · Answer

I would always try to negotiate 51/49 if you can.  There are always issues that come up : money, designing, selling and management style if you HOLD.  This will benefit you the most if you HOLD properties. I have been taught that you always need to protect yourself.  FYI getting the funding is the easy part

Mary Danna · Answer

Since you're a real estate agent, you might also want to consider the Syndication classes offered by Gene Trowbridge through CCIM. It's probably around $200, but I've found the CCIM classes to be excellent overall. Gene also travels to offer the same classes as CE in many states, so keep an eye out in case he's in NY.

AJ Shepard · Answer

Marco,

First question is that say your partner gets a 0% loan, sounds like a great deal, but over what period does it need to be paid back?  Is it a 30 year note, a 5 year note on a 30 yr amortization?  This will define the payments that need to be made.  From there you will want to look for a deal that you can leverage that amount of money to get those payments made.  For instance, if you buy a 100k house that rents out at $750 / month and use all the investor's money to buy the property, you would have $750 / month to split at the 50/50.  Presumably, you would be paying back the loan of 100k first and then taking profits second.  On a 30 year loan at 0% payments would be $278, leaving you about $560 to split.

Take that same scenario but instead, you buy 2 houses at 100k each, both with 50k of bank financing at 5%.  So, 100k from investor at 0% and 100k from bank at 5%.  You now have $1500 coming in, less bank payment of 416 per month and less 277 for investor payback.  This then leaves you with ~$800 to split.  These are very rudimentary examples and there are a lot more expenses that go in to owning a property, but this gives you a basic example of how you can leverage your investor's money.

At some leverage point you will max it out with the banks and most banks won't loan over 75% LTV.  Hope this helps.  Happy hunting!

Originally posted by @Marco Nasso:

@Brian Geiger i know very well the capital partner. She’s just looking on having passive income coming in every  month, while  I’ll be responsible to find the deals as well carrying the loan.

AJ Shepard · Answer

@Marco Nasso for most real estate deals and business in general.  Income is generated and pays expenses.  What ever is left over is profit and typically split between equity partners on investment percentage.

Marco Nasso · Answer

@AJ Shepard the idea is to use that money for multiple transactions, like 5-6 multi family.

I wanted to understand if would be fair to split 50/50 the monthly loan payment or just having the investor paying the monthly loan and giving 50% of equity in all deals.

Marco Nasso · Answer

@mary

@Mary Danna thank you for the advice!

BJ Everson · Answer

@Marco Nasso This is tricky b/c it's at 0% interest, which means it's not a cost to her but a "return of capital/loan proceeds" so she's paying herself back. And my answer would depend on what she is asking about what to do about the monthly payments or not. If she's asking what to do about it, then I would borrow 3-6 months of the monthly payment from her "loan" and use that for the loan payments monthly. Or I would consider it she gets 50/50 excluding those payments back to her. So they arent part of your cost structure. Let me know if that doesnt make sense.

Marco Nasso · Answer

@Dennis Cosgrave thank you I’ll definitely buy the book!

Marco Nasso · Answer

@Brian Geiger i know very well the capital partner. She’s just looking on having passive income coming in every  month, while  I’ll be responsible to find the deals as well carrying the loan.

How Structure a Private equity Deal

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