All Forum Posts by: Jamie Douglas

Also, the structure should include a preferred return for all unpaid equity.

Hi,
We own a few rental properties now and have a contact who is interested in joining as a significant silent partner. He is interested in a waterfall structure of some sort with a preferred return and he's asking us to make a proposal of what the various hurdles would be. We will be putting in 20% of the capital. We've not done anything before with a structure like this and I've been reading about them here and elsewhere, but I have a few basic (I think) conceptual questions that I'm not understanding.

Our goals for these single family homes is to buy them, rehab, rent for 10-15 years, and sell. Most of the waterfall examples I see seem to assume a short term project where there is an initial investment of cash that is then paid back within a year or two at the point of sale of the property. How does a waterfall work when you would have a long term of rental income? At what point are you paying back the initial capital - all up front with all cash flow that exists or until the end at the sale?

We've discussed in general waiting until the house has a tenant and rental history and then getting a cashout loan to invest further in other houses.

Also, I'm confused about how the IIR is calculated in general. If the capital is being paid back early in the life of the property, does that mean the IIR is increasing because there is actually less and less capital in the property? Or is it calculated based on the initial investment.

Lastly, most of my searches have been for things like waterfall structure, or iir waterfall, or preferred return waterfall. I've found some information but not a ton - is there some other name for this kind of structure that I could read about? I feel right now that I have more quesitons than answers :)

I know that often the answer is 'you can structure a deal however you like' but if someone could give me some guidelines of what is typical, that would be very helpful.

Thanks

I have a few rental properties that I manage myself and have recently started buying foreclosures at auction to rent and hold. For me, the goal has been all about long-term investment and cash flow. I've been doing this as a secondary income up to this point, but am interested in making it my primary income.

A very close friend of mine has come to me wanting to supply cash for these deals. He is interested entirely in long term investment and doesn't care at all about cashflow. He also has much deeper pockets than I do. He wants to supply the cash but have absolutely no involvement in the purchase decisions or management of the properties and he has asked me to propose a structure to the arrangement and I care very much about being fair to both of us.

What I bring to the table:
Time
Experience with property management and property purchases
he values his trust in me a lot (he's had some money stolen from him in some previous poor choices)

What he brings to the table:
Cash

I am still interested in also also supplying some of the equity. I could put in 20% on about 10 more houses at this point...but he's also interested in doing more properties than that, at which point I wouldn't have the capital to contribute.

I'd love to hear your thoughts on how to structure this partnership. I certainly intend to work with an attorney on this, but right now I'm not even sure what I would propose.

Thanks