Hi everyone! I have a property with the following attributes (summarized) and am hoping to get some guidance on the best way to finance with my business partner.
Property Summary:
List Price: $230,000
Estimated Monthly Gross Rental Income*: $3,400
Estimated Monthly Operating Expenses**: $1,500
Net Cash Flow: $1,919
I have a business partner who may be interested in either a private lending of full equity arrangement, and I want to be sure that the deal is beneficial to him. However, I'm not sure which route is best.
Option 1: Equity Partnership
If he provides the full $230K, I cover closing costs and manage the property, and we split the cash flow 50:50, that would give us each $960 per month, $11,516 annually. If in the future we sell the property, he would reclaim the full $230 and we would split any profits from the sale 50:50. While I think this would be a good deal for me, the annual return for my partner would only be about 5%, though this does not take any future sale into account. What sort of return do equity partners typically ask for? Or do they care more about the consistent cash flow or possibly upside when selling the property?
Option 2: Private Loan
In this option, a promissory note is written for my partner to loan me the down payment amount (20%/$46K) for a 2-5 year term at a 10% interest rate (details are still up for negotiation - are these terms reasonable for this kind of deal?). This brings the cash flow for us to a little less than $300 a month after expenses. This is obviously much less, but the return for us is still around 30%. My partner for sure gets a 10% return. Downsides are that he gets none of the potential upside when the property may be sold down the line, and we have to find a way to ensure that we build enough equity in the property to do a cash-out refinance when the loan term ends to pay it off.
Overall, which option seems like the better choice? What do private lenders or equity partners look for? There are pros and cons to both approaches, so I would love some input here :) Alternatively, if this doesn't seem like a good enough deal in general, please let me know what you think!
Notes:
*This value is based on rental comps in the area as well as the current lease agreement for one tenant
**Prior years' operating expenses were estimated based on current owner's actual operating expenses as provided by the listing agent. This amount includes utilities, taxes, insurance, repairs (8% of rents), vacancy (8% of rents), and capex (5% of rents).
Link to the Redfin listing: https://www.redfin.com/ME/Augusta/39-Oak-St-04330/home/99940...
