Partnership on a househack: What kind of deal would you accept?

Question

Hi everyone,

I'm super excited to get started investing in real estate and my current goal is a househack of a duplex or triplex here in Los Angeles where I live. Because I'm a business owner/self employed, my finances only qualify me for a 15% down payment loan. I would need to find the cash to cover the down payment, but I'm good to go with our portion of the mortgage/PITI. We would either find a vacant property or convert the other units to mid term rentals once the long term tenants move out. (I own a mid term rental management business, so I got that part nailed down.)

My question is, would it make sense to an investor to partner with me and provide the cash for the down payment? The property wouldn't cash flow unless I choose to pay more than I need to for the (PITI - rental income). Would it be attractive enough if, let's say, I offered the partner 60% of equity and future cash flow? My family would probably move out of our unit in 2-4 years and at that point there would definitely be positive cash flow renting out all units as MTRs.

Here's the summary of what I'm thinking of offering a cash partner.

-They would get 60% equity and 60% of cash flow

-Cash flow won't be positive until 2-4 years later

-When we eventually cash out refi to buy our next property, which may be in 2-4 years as well, the partner would get their 60%

-If this isn't attractive enough of a deal, would 70% or even higher make it worthwhile?

I'm fully on board with the idea that the most valuable thing about my first deal is all the learning I would get. This is why I'm not worried about getting a smaller share of the property if it means I can get the snowball started. Added bonus would be a better home for my family since we're renting now.

I appreciate your feedback. Feel free to pick apart my plan and ideas =)

Jacob St. Martin · Answer

I would second a lot of what taylor is saying. Investors want to be getting a return on their capital right away. I house hack and brought in a business partner to help on the down payment and to cosign. If you are bringing capital to the deal I would recommend a structure where you split the equity according to the % that each person contributed and you split the cash flow 50/50 as a bonus to you for managing the property. If you are not providing any cash to the deal I would do this instead: Your cash provider brings 100% of the startup costs and you treat yourself as a tenant. You "pay rent" so that the property is generating cash flow and split that cash flow according to your agreement. This way you are at least providing some return to your partner even if your rent is higher. Additionally, for your first househack you may need to sweeten the pot for the investor. I am trying to get into my second house hack deal right now (an STR house hack) and I am offering potential investors 100% of the cash flow until they have regained 50% of their original investment at which point we become 50/50 partners. This structure shows that you are willing to work hard and prioritize their return over yours. I haven't gotten someone on board for this yet but I am confident I will find someone through hard work and so will you!

Matt Giacinto · Answer

Hey Allen, there's a variety of ways you can look for an investor or equity partner, especially in LA. Let's connect, I'm a commercial real estate agent in LA and could probably help you find somebody who'd be interested.

Allen Duan · Answer

Rick, that's definitely another great option. I've considered it, but it's just a matter of finding an investor who wants to lend vs get equity.

Thanks Leona, I'll keep you in mind

Leona Usaty · Answer

@Allen Duan Hey Allen, Welcome to the real estate investing world; we are partnered with Wells Fargo, and they currently have a good program that allows you to purchase a property with 0-3% down. And it’s not for first-time home buyers. If you need more details, feel free to contact me. For December, we have helped seven buyers under this program.

Leona

Rick Albert · Answer

What if you just got a loan from an investor? That way you 100% own the property and can pay them back accordingly.

Allen Duan · Answer

Thanks for finding my old post and responding Rick =)

I get what your saying. I'm in this situation because I don't qualify for a 5% or lower down payment for a house hack. So I'm doing this mental exercise to see if there's a scenario that makes sense for someone to provide the capital for the down payment while I live in one unit. It's a unique situation for sure and I'm making the moves so I can qualify for a low down payment loan for a house hack in the near future.

Rick Albert · Answer

I think the issue is opportunity costs for an investor. They take 60% but does that also mean they take on 60% of the repairs, vacancy, and other expenses? Could they park their money elsewhere where they can get cash flow?

In Los Angeles,  you tend to focus on appreciation, which I agree with. But most investors I know want some cash flow from the start. House Hacking is the different because they would be paying rent as a primary regardless so it makes sense.

Plus how does this benefit you by taking 40% equity? Why not find other properties and keep 100%? You are losing money either way so you might as well make it worth wild.

Allen Duan · Answer

Thank you Taylor and Jacob for your thoughts. They are very helpful for me to see other dimensions to this sort of arrangement.

Taylor: I don't have a large amount of reserves so this will play into what condition the property would have to be and how much work/time it'll take for rehabs. I'm targeting something that only needs cosmetic work and potentially only for the unit we'd rent out. The unit we'd live in could be worked on over time.

I definitely want to find a property with value add potential since our plan is to cash out refi in the near future to buy a second property. Maybe because I'm in Los Angeles, I don't view cash flow as an absolute essential, at least not right out the gate. David Greene mentioned in a recent Seeing Green episode that we investors tend to focus too much on finding a property that cash flows immediately. While it's much easier for me to do that with mid term rentals, it's hard to find a deal like that in LA.

A debt partner is an idea I'm considering too =)

Jacob: The paying "rent" idea is also variable I'm considering. That's what I meant by paying more than I need to to create cash flow as if we were renting out all the units. I like your idea of offering 100% cash flow until a certain amount is returned to the cash partner. These are all great variables to discuss with a partner. Thanks!

Taylor Dasch · Answer

First, do you have the income to pay both sides if it is not rented out? I would be worried about that as it can deplete your reserves very quickly. I purchased two on a HML and the rehab took much longer than expected. It ended up depleting everything and now I am trying to get them refinanced and having issues because I dont have reserves.

The investor would be getting 60%/70% of nothing for the first 2 years and equity is not too big of a motivator IMO, unless there is value add potential. Also, I wouldnt buy a property that doesnt cash flow. If it will cash flow if both sides are rented, I would offer to pay the investor interest until I moved out then offer the 60-70% cash flow. But It may be a better idea for both sides to just have a set interest rate that is higher than what they would get in the stock market, so like 10-12% then pay them off while you are living at a discount. You can offer some sort of equity split as well to make it more appealing.

Partnership on a househack: What kind of deal would you accept?

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