All Forum Posts by: Jon D.

Thanks for the reply.

This is an interesting discussion because another person I've talked to suggested that the accurate equity % should be based on the downpayment funds only. 10% & 10% means 50% 50% and mortgage means nothing. That seems like the logic would fail quickly when they're essentially saying that a 20% DP + 80% Mortgage partnership would be 100% to the DP partner and 0% to the mortgage partner.


I have a fairly good understanding of the mortgage underwriting process. If person B actually has the funds for the full down payment, but just doesn't want to leave them all locked up in the property (and wants a partner) than it's pretty easy to just buy 100% himself, transfer to entity, and sell equity to partner A afterward to recoup the % they didn't want to keep in equity. There is nothing that the origination bank can do.


I'm sort of surprised that the range of answers to this question are so large. 

How about taxing authorities? Seems like a very good way to transfer net worth from one party to another is to just use transferor 20% DPs with mortgaged transferee's 80% of profit. 20 years later ~75-80% of the wealth would be transferred. You could find all sorts of interesting uses under such a method.

James, 

That logic makes a lot of sense to me, but the opposite also seems off. Would it actually be true that a person who takes out 80% mortgage and nothing down deserves 80% of all of the after expense profits while the person who put the 20% down of their own money only gets 20%?

I mean if there a load of people who are willing to take 20% shares and give me 80% for just using my credit and underwriting profile than please line up... I'll definitely be open for business. 

The fact that the 20% is also subordinated to paying my mortgage payment first it just seems like a screaming deal to the mortgage partner, doesn't it? 

Bump

Oh and on the PG topic my understanding is that one partner can buy the property, transfer the property to LLC, and then sell a stake in the property to other partner. The lender doesn't really have anything to say at that point.

Okay. Let's assume loan terms on the DP were not workable for the situation and that the partners could not be sure that they would always have offsetting investment properties to take opposite sides of. 

It seems safe to assume that non borrowing party should probably get some multiple between 1x and 4x their downpayment. I.e. 10% DP should convert to something between 10%-40% of the building (15% would range 15%-60%, full 20% would range 20%-80%).

It also seems that if both parties are truly non labor investors or equal labor investors that the shorter the deal the more you would go towards 1x and the longer the deal the closer you would get to 4x. I'd be curious to hear if others agree with that logic. 

In a non flip transaction (buy and hold only with a 7-15 year time horizon) is 2-3x DP seem reasonable? I.e. 10% becomes ~25% equity? 15% becomes ~40%? 

How would your numbers defer? 

Bump

I'm going to try this more succinctly because my first post was likely too long and unnecessarily confusing.
2 partners on a property. Lets say *neither are contributing any labor or what labor is rendered is paid for separately.*

A is contributing 10% DP + only person on mortgage
B is contributing the other 10% DP.

In this scenario what do you think the equity split should be? 

How do you think it would change if A contributed 5% + mortgage and B contributed 15% of DP?

I just want to make sure I read this right.

A: 10% DP. Right to 9% property management and has no mortgage liability = 75% of profit split
B: 10% DP. Takes all the mortgage liability = 25% of profit split?

Or do you mean the opposite: 75% to B & 25% to A?

Threads move quick here. Bump.

here appear to be a lot of discussions about partnership/JV splits when 1 party is all money and the other party is all sweat/brains.

I'm curious about slightly different split of finance/equity and I'm also referring to buy and hold (not flip) cases.

Fact Pattern:
-Party A: Currently owns properties, property management experience, wide network of subcontractors/maintenance, good at valuing improvement costs, realtor license, etc.

-Party B: Finance and strategy, some legal. Creative in tax structuring, creative in loan financing markets, and can likely get better value out of the credit markets.

Let's say Party B is sole party on the mortgage at 80% LTV in each circumstance. Party A has a right to retain property management fee at 9% or can choose not to and hire a separate one at whatever cost. No expectation of sweat equity into improving the place. Repairs, etc. all hired out.

Now

Party A puts 10% of the 20% downpayment into the situation, how much equity split do you think there should be?
Party A instead puts 15% of the 20% downpayment into the situation, how much equity split?

20%?

5%?

Feel free to just answer on those 4 scenarios without elaborating. Elaborating more is appreciated.


Presume that the equity/profit split is after mortgage payment/payoff as well as property management and all expenses. I also realize that some lenders require part owners above certain percentages of ownership co-sign the mortgage... presume that isn't an issue in this case.

Lastly, I get that most fix and flip have more even splits while buy and hold investments often result in the question of why the mostly money person needs the other person at all, but in this case with the money situation bifurcated I'm curious as to how to best handle.

Thanks