All Forum Posts by: Devin A Hanley

Hello,

I am looking for someone who is able to help me and my partner set up the contract for our JV. We are looking for someone who can help put in writing what our operating agreement is. Please let me know if you have any recommendations. Thank you!

Quote from @Alex Breshears:

Hi Devin:  Option 2 sounds like a scam. As a private lender, this most common terms are 100% financing for 30 years at 5% interest only.  Please really really vet that lender BEFORE you send them any money (don't do this!) or make a full fledged plan on closing this opportunity  with this loan.  Think about how risky it is for a lender to be into something 100% right now. The economic downturn could make the market lose value, for multifamily over 5+ units the cap rates may increase, rental subsidy programs may lock tenants in at lower rates or a landlord waiting on the programs to make the payments on a tenants behalf, maintenance falls behind, a major fire destroys part of the building. There is just so much that COULD go wrong that can affect the value, and the owner/operator doesn't have control over all of them.

Thank you for the response. I am skeptical of it as well. I have not sent out personal info or funds. This is simply what they had said they are offering and I am curious of peoples opinions on it. Thank you for your insights!

Quote from @Kerry Noble Jr:

Let me ask you....with option 1, would your partner be open to doing more than 1 deal? 

 Yes, we potentially would. Good question.

Hello. I am reaching out to the community to get some opinions on the 2 options that I currently have for a multi-family that I am under contract for. It is worth noting that in both of these scenarios I will be managing the day to day operations of this property and my partner would be relatively uninvolved. And I am planning on holding onto this property for a long time.

Option 1: I have someone who is willing to partner for this property. They will put up the 25% down payment and for that they will take on 40% ownership of the property. Meaning that they will take 40% of the profits every month as well as 40% of the profits if we decide to sell. I will be responsible for servicing the loan which I will do from the rents we collect. With this we would have a loan set at 6% for the first 5 years, then it will change to what ever the 5 year treasury is, plus 2.75 points. With this deal I should cash flow $1100-$1300 per month.

Option 2: I have an offer for a 30 year loan with zero down payment. The payments would be interest only at a 5% rate. At the end of the loan I would then need to give them the full payment for what the loan was for. If I were to do this I would not have a partner. There is also no penalty for paying this off early. Because this loan gives a lower monthly rate and I would be the only one collecting it my cash flow monthly would be closer to $3000.

With option 2, I will be paying about $200k more in interest over the life of the loan. And, I will profit less at the sale of this property because I will have not paid down the principal. BUT, I will make over twice as much while owning it, and at the time of sale I will be able to keep 100% of the profits rather than paying out 40% of them. This is in an area where appreciation will be slow, but I am sure there will still be some over the next 2 to 3 decades.

And, just in case it helps, the purchase price of this property is $485k. In option 1 the loan would be for $363.5K. And in option 2 it would be for the full $485k.

I am curious what your opinions on this may be. I am leaning towards option 2, with the idea that I would be able to re-coup much of the extra $200k I pay in interest at the sale of the property. And that the extra $2000 per month will have a more dramatic impact for my family. But, I may be missing something here....I'm just not sure what that is?

I appreciate any insights or opinions that any of you may have. Thank you!

Hello. I am reaching out to the community to get some opinions on the 2 options that I currently have for a multi-family that I am under contract for. It is worth noting that in both of these scenarios I will be managing the day to day operations of this property and my partner would be relatively uninvolved. And I am planning on holding onto this property for a long time.

Option 1: I have someone who is willing to partner for this property. They will put up the 25% down payment and for that they will take on 40% ownership of the property. Meaning that they will take 40% of the profits every month as well as 40% of the profits if we decide to sell. I will be responsible for servicing the loan which I will do from the rents we collect. With this we would have a loan set at 6% for the first 5 years, then it will change to what ever the 5 year treasury is, plus 2.75 points. With this deal I should cash flow $1100-$1300 per month.

Option 2: I have an offer for a 30 year loan with zero down payment. The payments would be interest only at a 5% rate. At the end of the loan I would then need to give them the full payment for what the loan was for. If I were to do this I would not have a partner. There is also no penalty for paying this off early. Because this loan gives a lower monthly rate and I would be the only one collecting it my cash flow monthly would be closer to $3000.

With option 2, I will be paying about $200k more in interest over the life of the loan. And, I will profit less at the sale of this property because I will have not paid down the principal. BUT, I will make over twice as much while owning it, and at the time of sale I will be able to keep 100% of the profits rather than paying out 40% of them. This is in an area where appreciation will be slow, but I am sure there will still be some over the next 2 to 3 decades.

And, just in case it helps, the purchase price of this property is $485k. In option 1 the loan would be for $363.5K. And in option 2 it would be for the full $485k.

I am curious what your opinions on this may be. I am leaning towards option 2, with the idea that I would be able to re-coup much of the extra $200k I pay in interest at the sale of the property. And that the extra $2000 per month will have a more dramatic impact for my family. But, I may be missing something here....I'm just not sure what that is?

I appreciate any insights or opinions that any of you may have. Thank you!

Hello. I am reaching out to the community to get some opinions on the 2 options that I currently have for a multi-family that I am under contract for. It is worth noting that in both of these scenarios I will be managing the day to day operations of this property and my partner would be relatively uninvolved. And I am planning on holding onto this property for a long time.

Option 1: I have someone who is willing to partner for this property. They will put up the 25% down payment and for that they will take on 40% ownership of the property. Meaning that they will take 40% of the profits every month as well as 40% of the profits if we decide to sell. I will be responsible for servicing the loan which I will do from the rents we collect. With this we would have a loan set at 6% for the first 5 years, then it will change to what ever the 5 year treasury is, plus 2.75 points. With this deal I should cash flow $1100-$1300 per month.

Option 2: I have an offer for a 30 year loan with zero down payment. The payments would be interest only at a 5% rate. At the end of the loan I would then need to give them the full payment for what the loan was for. If I were to do this I would not have a partner. There is also no penalty for paying this off early. Because this loan gives a lower monthly rate and I would be the only one collecting it my cash flow monthly would be closer to $3000.

With option 2, I will be paying about $200k more in interest over the life of the loan. And, I will profit less at the sale of this property because I will have not paid down the principal. BUT, I will make over twice as much while owning it, and at the time of sale I will be able to keep 100% of the profits rather than paying out 40% of them. This is in an area where appreciation will be slow, but I am sure there will still be some over the next 2 to 3 decades. 

And, just in case it helps, the purchase price of this property is $485k. In option 1 the loan would be for $363.5K. And in option 2 it would be for the full $485k.

I am curious what your opinions on this may be. I am leaning towards option 2, with the idea that I would be able to re-coup much of the extra $200k I pay in interest at the sale of the property. And that the extra $2000 per month will have a more dramatic impact for my family. But, I may be missing something here....I'm just not sure what that is?

I appreciate any insights or opinions that any of you may have. Thank you!

Quote from @Nathan Gesner:

Quote from @Devin A Hanley:

It could be fleshed out better, but most beginner deals are pretty basic. After you've done a couple or have a year or two of experience, then you'll better understand the value each person provides and determine a more detailed split.

Make sure you have it in writing and cover all the contingencies (repairs, renovations, vacancies, sale, etc.)

 Thank you for the response Cody. What the current plan is for a 60/40 split, my partner putting in the capital will have the 40% share. My name will be on the loan so I will be the one responsible for servicing that, and those funds used to service that will come from the revenue our property makes. So I am not asking them to take on that extra risk of backing the loan.

They will also take a 5% preferred payment, meaning that I will not take a cut until they have 5% of their initial investment paid back to them, which we estimate to take about 4 months.

I will be managing the day to day (which should really just be making sure our PM is doing his job) and I will do so without taking a management fee. I am also not taking any acquisition fee either.

As of today we both seem Ok with this set up. They would like a higher preferred payment, I would like more equity, but it seems like we may be able to move forward with this arrangement without anyone feeling like they are being taken advantage of. It has been hard trying to find out what a typical arrangement for something like this may be, if there is one. I hope you're right that with a bit more experience it will be easier to quantify someone's value. As of now it seems like the ratio of the value our roles have to our equity share is pretty subjective. 

And yes, we absolutely will be hiring a lawyer to get all of this in writing to cover the deal and it's contingences. 

Thank you again for your response!

Quote from @Account Closed:

@Devin A Hanley

I agree with you that a 25% equity partner should get significantly more than 25% ownership and 45% seems reasonable. The whole debt service thing needs more thought, though. I suggest analyzing this from the equity partners perspective. You are asking him/her to put in 25% up front, which is the highest risk position. Then, you want him/her to take on more risk by backing the loan and then he/she would have to pay off half the mortgage. At the end of the day, the partner will have paid 75% of the project costs and taken all the risk. All this for an 8% preferred return and 45% ownership. I can’t imagine an equity investor going for this.

To me, the JV should be set up where the equity partner puts in 25% and the general partner takes out the loan and does all the work. The equity partner would still get 45% ownership and the 8% preferred return with everything split 45/55 after that.

I wouldn’t get hung up on the structure. The equity partner would be a limited partner and you’d be the general partner.

 Thank you for the response! I appreciate your insights here. We are currently planning on a structure very similar to what you had mentioned. What the current plan is for a 60/40 split, my partner putting in the capital will have the 40% share. My name will be on the loan so I will be the one responsible for servicing that, and those funds used to service that will come from the revenue our property makes. So I am not asking them to take on that extra risk of backing the loan. 

They will also take a 5% preferred payment, meaning that I will not take a cut until they have 5% of their initial investment paid back to them, which we estimate to take about 4 months. 

I will be managing the day to day (which should really just be making sure our PM is doing his job) and I will do so without taking a management fee. I am also not taking any acquisition fee either. 

As of today we both seem Ok with this set up. They would like a higher preferred payment, I would like more equity, but it seems like we may be able to move forward with this arrangement without anyone feeling like they are being taken advantage of. 

This is not set in stone, and I am new to a partnership like this so I am unsure what may be typical here, but it seems like we could both move forward happily with this arrangement.

@David M.

Truthfully we have not dived into the title yet. We are first ensuring that we agree on how the financials will be split before getting into those details. I am not saying that the title portion is insignificant, but if we don't have an equitable split then that question is irrelevant.

As for the JV vs Partnership here is something that I had seen helping explain the difference:

" In a partnership, as an example, one member can be sued for the actions of the other partner's children. For instance, if a partner let's his kid drive his car and the kid gets into an accident and seriously injures someone, both partners can be sued. Each of them are acting as agents of the partnership.

In a Joint Venture however, each member is acting as their own agent and the court will recognize that there is a wall of protection from one member's actions to the other. And there are several other serious differences. They are not the same as far as the law is concerned.

"Liability Issues

In a partnership, all members are jointly and severally liable for the debts and obligations of the entity. Individuals are accountable for their own actions, as well as the actions of the other members.

A joint venture may be set up as a separate corporation or other limited liability company, which means participants are only liable to the extent of their investment in the company they create."

I do like your point about one side leveraging credit as well. And I couldn't agree more on people being too concerned about what the other side is making. The COC return her is excellent and it would be hard for one to be able to get such a high return on a property that is basically a turnkey. That is another element that allows for some leverage.

Thanks again for the thoughtful response David. I appreciate being able to bounce these ideas off of others.

Quote from @David M.:

@Devin A Hanley

That seems like way too much....  If the investor puts in 25% and all other things being equal, the investor has a 25% stake in the investment so should get ... 25%...  

Are you desperate for the money down?  Is the returns setup somehow because its being considered as some sort of loan??

How is Title being taken?  Are you going to use an entity?

How is the "joint venture" going to be structured? Maybe I am silly or ignorant, but JV to me is just a business term of two parties agreeing to partner on a business deal. Its not a legal entity, nor in it of itself does it imply any sort of legal or partnership arrangements. So, what's the deal?

Thanks for the reply David. No, I am not desperate for the money down, but I would appreciate not having any cash in on the deal. That would allow me to quickly move on to the next investment, while owning the majority of this cash producing property, of which I have only invested time into.
And no, it is not considered as a type of loan. It is viewed at as a long term investment.

My thought is that the initial capital is considered to be more valuable. The remaining 75% of the mortgage that is to be paid off will entirely come from the properties revenue. So 25% of what the partner owns is also going to help to pay off my debt. 

And yes, my understanding is also that the JV is a term of two parties agreeing to partner on a business deal. We would each do separate taxes and would not be legally responsible for something that the other partner does. I believe that it is a cleaner and more simplified version of a partnership that allows each of us to have more outs if needed.