I have an offer from a family friend to finance my next rental property. He is generously doing this as support for me, and thus he's letting me decide how I want to structure the deal (so long as he still makes money too, of course). I see two options available:
1) He finances solely as a line of credit. We haven't discussed exact rates, but I think it's rest-assured that it's going to be pretty reasonable (maybe 4.5 - 5%). He'd be willing to do 100% of the all-in cost, but I wonder if I should just only take 80-90% to keep a "standard" amount of equity for myself (just in case the market turns south or so that if I ever needed to convert to a commercial mortgage someday, then I'd already have the downpayment worked in).
2) He comes in as a passive equity partner. It'd be a 50/50 equity split with him financing 100% of the deal and me running operations (also assume that he may or may not want a return on capital off the top of the net cash flow). I'd be assuming no financial risk if the deal (god forbid!) went bad, but I'd also be splitting half the appreciation instead of assuming it all. Considering we'd be paying cash (and thus there'd be no interest coming off the NOI like with option 1), my cash flow comes out the same as it does when I take out 80% on the LOC in option 1.
Which of these scenarios do you think sounds more fruitful? I guess where I'm getting hung up is trying to figure out how to value the equity I'm getting with the LOC vs. the no risk/no money down partnership? Obviously there's more upside to the LOC, but there is something awfully enticing about an unlimited return. Furthermore, if I go for the LOC, is it better to take out 100% of the all in cost or should I leave 10-20% equity for myself (which I can afford)?
