Disclaimer: This deal contains several assumptions that have not necessarily been researched and analyzed properly. It also does not account for every expense that will be incurred. They are fairly rough numbers. It is based on a real potential deal but contains many hypotheticals. I am just looking for feed back on how to present it and wheter or not the terms are fair to both parties. I am also very new at this so a little advice(and also maybe a little slack) would be greatly appreciated.
I am looking at a 3 family property for $460k. I want to finance it using a 20% down conventional mortgage. I have a potential investor willing to bring $85k to the table for down payment. I would bring the remaining $7k plus closing and the mortgage would be in my name. This partner would be completely silent I would have full responsibility for every aspect of management etc;. I would also be living in the property for the first several years and the balance of the carrying costs not covered by rents would be paid by me.
This investor is actually a family member who has the cash but may not necessarily be looking for somewhere to just "stick it" for several years. For this reason I want to treat his $85,000 more like a loan. Here is how I would pay it back.
Monthly mortgage(including taxes and insurance):$2450
Monthly rents on two units I don't live in: $2400
This leaves me with only $50 dollars out of pocket/month(not counting maintenance and such). I would repay his $85k plus $15k interest over 10 years at about $830/month. On top of this after I move out I expect the rents to net $2050(again this does not account for maintenance, vacancy, etc; only P&I, insurance, and taxes) I would promise him 25% of this number starting the month we begin renting all three units.
To take it even one step further if we assume 3.5% appreciation/year over the next ten, which is not out of reach in this area, it would be worth $650k in ten years. I don't want to tell him we definitely will sell at that point but if/when we do I would promise him 25% of the net profit from sale. Which is about $80k after commission and paying off the balance of the loan. I know you can't assume appreciation and it is just icing on the cake but I would make this clear to him going into it. This is just a selling point. He is also very smart and knows that no investment is a true "sure thing".
Basically when it's all said and done he is putting in about 18% of the purchase price to buy himself 25% of the property and 0% of the "headaches". I think this would be a great deal for some one that had the money to invest but didn't want to handle it them selves.
What do you think? Am I crazy? Is this unfair for either side? Does either side carry too much risk?
