Hi All,
This is my first post on the forum. Been a long time listener of the podcasts and have inspired to "get in the game" but have been on the sidelines for about a year.
My background: Work a full time job in Finance and have excess capital which I'd like to invest through real estate. I've always wanted to invest in property because I'm intrigued by opportunity of projects & turnarounds. I live and am interested in investing in North Jersey area. I have expressed my interest in investing to several potential partners (most of whom are also newbies and not experienced). We have ran numbers and viewed some properties but nothing has become of it thus far.
The opportunity: A friend had recently bought a single family home (3 bed/1bath, 1400sqft) in Linden, NJ for $202k. He spent $50k on renovations (bathrooms, kitchen, floors). He financed the deal through a private loan of $240k ($264k due back to lender w/interest). After renovations the home was appraised at $320k. There is believed some additional value in the home as there is a 4th bedroom and second bathroom in the basement, which was not considered for comps in the appraisal.
Here's where it gets interested ... the original plan for my friend who owns the property was to refinance at the appraised value and pay back the private lender. BUT when the bank was doing their due diligence they discovered the private lending deal and because it was not documented with the town, they would not refinance. The private loan is due back immediately at this point and he is looking for a partner to split fronting the capital for this $264k loan to be paid back and therefore be 50/50 owners on the property. The buy-in for the partnership is $140k (loan+reno). Then the plan would be to document correctly and go back to the banks to refinance the home such that the current rent being paid by the tenant would cover the carrying costs of the refinanced loan+taxes. That works out such that each investor's math would be the following:
($140k) capital buy-in for partnership and possession of the property
+$95k cash-out from refinance within 3-6 months
Leaves ($45k) invested capital in the home, with initial equity at appraised value being aprox $65k.
The current tenant is the other partners mother + boyfriend. They have an option to buy the property at the appraised value within 2 years or to continue paying rent. If they do not chose to buy, then the exit of this investment becomes much longer dated and unknown. Essentially to enter into this partnership I would stipulate an option to exit after 5 years.
Questions for the Forum:
1) Are there any major pitfalls I need to further investigate or be aware of?
My concerns are mostly with:
2) The ability and certainty to refinance and pull back a majority of that initial capital I put into the partnership
3) An uncertain exit strategy is not ideal, even though we'll have equity from Day1.
