Buying real estate with a friend (structure?)
Hello. Two friends want to buy a property together. One person lives very close to the property (4plex) and has a lot of experience managing properties because he owns other properties over many years. The other has no experience in real estate but likes to invest in hands-off ventures like stocks. By themselves, none can buy the property, however together they can qualify. The person who will manage the property and lives nearby has all the down payment (60 000$) needed for the property but he doesn't qualify by himself because he has low income. The other person also doesn't qualify for the property because he's currently putting all his money into building a single-family house for himself to live in so he has 0$ available to invest in the 4plex but he has a very good personal income of 200 000$.
The person with no money argues that without both of them together, they cannot buy the deal but recognizes that the person who will spend time managing the property has an advantage because he will spend more time and money into the property. He proposes to share everything 30-70% in favour of the person with the down payment until his share of money invested is also 60 000$ at which point everything will be shared 50-50.
The person with the money argues that he's the one taking all the risk and doing all the work so the share proposed is not fair. He can look for another good deal (real estate, stocks or other ventures) by himself and not have to share. He suggests that he should get 100% of the income+10% for managing and pay 0% of the expenses until the income and expenses are equal to his 60 000$ down payment. Once the other party has also put 60 000$ in the property, they will split everything 50-50 but the person managing will get 10% for managing fees.
Both really want to go forward with this deal because they recognize the property is sold at a good price, they are very close friends and want to arrive at a fair proposal that both can agree on. Who of the two has the most reasonable proposal? What would be an even better proposal than what the two suggested? The goal here is to have a neutral party who will suggest the fairest proposal so that both parties will agree.
I feel like this is an essay question for some assignment.
In reality- it’s whatever they agree upon. You can argue anything here back and forth. It really is- who is the better negotiator and who wants the deal more?
Not at all an essay. This is a real question concerning a real situation. I just want the post to be neutral and not divulging which of the partners I am to have an objective response.
What does "low income" equate to? Find it hard to fathom someone saving $60K on a low income salary. Not saying it's impossible, but they must be super frugal.
He got 60k by refinancing another property he owns.
One partner is contributing capital, management services, and (seemingly) more knowledge, the other partner is contributing... a balance sheet? If I were the operating partner I'd maybe toss the balance sheet partner 10-20% of the deal, tops. He's strictly hands off and has no capital at risk, but given its four-units is probably susceptible to recourse should the whole thing go belly-up. If the balance sheet partner is going to contribute capital down the line, that changes things. I wouldn't start getting really granular with all this capital recapture and waterfall modeling and such. I'd also argue that asking for a 10% management fee from the property you already own is a little excessive as well. If I wanted to pay out 10% I'd hire a 3rd party and take that portion off the table.
unfortunately, only the really small deals and really big ones have deal structures this complicated, 90% of everything else in the middle there is a pref, and promote with maybe 2 hurdles.
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