All Forum Posts by: Blaise Peterson

Thanks for clarifying. So, we're not talking about a house I already own. We are talking about a JV for buying a house where I would be the equity partner bringing all the cash to the table. You would manage the property for 5-years, we would split the annual cash flow (not NOI) and sell at 5-years. Based on your numbers, we would each walk away with $90k plus 5 years of rental income. However, I put in $109k on day one and only recovered $90k at year 5. I would lose $19k, right? It seems more fair if the $109k were subtracted from the sale proceeds ($180k) and then split. We would walk away with about $35k each.

I don't know if this is true in the non-commercial space, but JVs don't typically look like this. Typically, the equity partner will hold a 60-80% stake, receive annual interest on the equity, get preferred returns on annual income and the final equity split at sale. Once the preferred return thresholds are met, the income and sale balances would be split 70/30 or something like that.

I think the idea is that the equity partner is providing the general partner with an opportunity to generate money with no capital and very little risk. The equity partner must make most of the money in order to get a reasonable ROI. The general partner will not make nearly as much money but the ROI can be very good--in your case, the ROI would be infinity.

@Theresa Harris @Jonathan Greene @Tim Delaney @Corby Goade @Adam Bartomeo I want to thank you all of your great suggestions! Here is a little more info related to my question:

My (note: "my" means my wife and me) daughter likes her job and finds it rewarding and fulfilling, and I am putting no pressure on her at all to change careers--my job has nothing to do with RE. She wants to talk about RE when she comes home for Thanksgiving so I want to come with with some ideas for her ponder. If I fail to spend all my money before I die, she will inherit the high credit, corporate backed NNN properties I developed/repurposed over the last 15 years. Residential, in my opinion, is a hassle so I am getting rid most of those properties so I can reduce my hands-on activities by 90%. This is better for her, as well.

Example: This past year, I've been working with the RE group in a big company. I've been working with job titles like construction project manager, who doesn't know a lot about construction but coordinates architects, engineers, GCs etc, the VP of RE management, who also does not know a lot about construction but oversees site selection, lease negotiations, property management, RE accounting who writes my checks and does annual CAM audits, and other jobs like that. I think these jobs would pay about what she makes now. With exception of the accountant, these individuals did not go to college with these careers in mind.

She can use my properties to suppliment her income without a lot of work and, in my opinion, have a lot of fun doing it. But, if she were to transition to a job in the RE sector, she would develop a skillset that would enable her to take this much further and in her own direction.

I have a couple reasons for posting this topic: the main one is that I think this is a good topic for discussion in the BP forums. Many BP people see contractor, RE agent and property manager as the only options to enter the RE business. I think it would be fun talk about other careers that would compliment their personal RE investing efforts.

The other reason is that I don't know the answer to my question. It would be helpful to learn how one lands the jobs that come up in this forum and how much entry level positions pay.

@Preston Gealy I posted my understanding of two scenarios above. I wish you would tell me if my understanding of your proposal is correct and, if not, explain to me what i am missing. I shouldn’t have to work this hard for an answer  

 "Cash flow"?

I agree with you, @Jonathan Greene. My approach has been to acquire/renovate/repurpose/lease-up commercial properties so I appreciate how much work and finesse it takes to match her salary. I don't think I could teach her that stuff so I am selling my ongoing projects and residential properties. It's a great idea to put together a single document summarizing the financials remaining properties (which I manage remotely) and teach her about commercial leases. Your other great point is that her day job maintains her lendability--I hadn't though of that.

Daughter: 26yo and earns >100k/yr and, historically, has rolled her eyes when I mention the phrase "real estate".

Me: Old, RE is a side gig, transitioning from hands-on RE investing to minimal-effort cash flow, selling most of my residential RE (keeping non-residential properties), want to spend all my money before I die so my daughter will not inherit anything :)

Given my best efforts, it's likely that she will inherit a respectable amount of RE. Now she is interested in getting involved and is open to a career change.

Question: Is there a job she could transition to where she would match her current salary and benefits? She's willing to go to graduate school.

RE agent and entry level PM would not be an options.

Thank you!

Still trying to get my head around this. Using your numbers: Owner buys house for 330k and transfers title to you plus gives you 110k (deposit and closing costs). So the owner pays 440k on day one. You do not pay anything on day one. Is that correct?

You make mortgage payments beginning on day one and manage the property for 5-years. NOI is 42k. Owner gets 21k and you get 21k minus the P&I payments. Is that correct?

Sell at 5 years: 530k minus 42k (8%) equals 488k. Is that correct?

How did you calculate 121k each? Profit to me would be 488k minus owner's initial investment (440k) equals 48k. The 50/50 split would be 24k. What am I doing wrong?

I think it's important to take the time value of money into account. The IRR for the owner would be very low.

What am I missing? I do not understand why an owner would do this. 

Couldn't the owner keep the property and take out a 75% loan (only 82k cash from owner), hire a PM @ 8%, cashflow about $350 per month, sell at 530k, pay off remaining principal (lets say 200k) and pay 42k closing costs, and walk away with 288k from an 82k investment? I can't do the math in my head, but the IRR would be pretty decent.

Note: I am the kind of person you were looking for in your original post--I am selling most of my residential properties and keeping my non-residental commercial. I am open to creative ideas where I would be the equity partner in a JV. To pique my interest, you need to explain this in a way that makes sense.

I think this is an interesting structure, but I am missing important details. Here is my understanding of what you are proposing: Let's say the house is worth $100k. On Day 1, the Seller transfers the title to you (100k), the closing costs (5k), transfer taxes, capital gains taxes (let's say 10k) and the 25% loan downpayment (25K). At that point, the bank owns 75% (75k) and you own 25% (25k). In other words, on day 1, the Owner pays 140k to transfer the title to you and you've saved 5k inclosing cost and earn an instant 25k in equity. 

I'm confused about the "50/50 split of net income and equity after 5 years", though. Are you saying the NOI would be split 50/50 and that you would be paying 100% of the mortgage payments for 5 years beginning on day 1? For example, annual NOI is 20k so we each get 50k over 5 years. Taxes would bring me down to 30k. Taxes and mortgage payments would be on you but you would recoup some of that back through depreciation, principal pay-down, interest deductions and other tax benefits associated with RE--let's say you make 15k. At 5 years, the house would be sold for 125k and there would be a 50/50 split. The original Owner would walk away with 50% of the gross sale price minus income tax (40k). You would pay-off the mortgage, pay all the closing costs, capital gains, income taxes, etc. and would walk away with, let's say 20k.

In summary: Owner pays $140k on day one. At 5 years, the owner makes $30k + $40k. The overall loss would be 70k but there would be significant losses related to NPV, lost opportunity costs and stuff like that. Total loss would be well over $100k.

You would earn 30k on day one, 15k rental income, 20k, a gain of 65k. 

Please clarify

@Preston Gealy If I understand corrrectly, what you are saying is not really the case. Your equity partner is taking all the risk. He/she is basically buying the property, giving it to you and you can do whatever you want with it. If you fail, you can walk away and not lose anything. 

I don't understand why an investor would pay a property manager 50% of the income and 50% of the property's value. Wouldn't it make more sense to hire a property manager for 8% gross? 

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