So my business partner and I just purchased a 4-plex. We had to put 20% down to purchase, and we used our HELOC’s to pay most of that 20%.
We would like to bring an investor on board (and have an interested party) to help us pay back our HELOC’s, which have crappy APRs. Our plan is to write a promissory note for 20% ownership of the building. Instead of making regular interest payments to the note holder, we would offer 20% of any positive cash flow each month, no management or maintenance responsibility, and a balloon payment of 20% of the net sales price when we eventually sell the building (probably 3 to 5 years from now). “Net sales price” would be defined as gross sales price less excise tax and other closing costs paid by the seller.
Does this strategy make sense, or are we way off track? Is this a reasonable offer to an investor, or are the terms not favorable enough to be appealing? What types of safeguards would you recommend (buy-out clauses, specific note language…)?
We’re trying to incorporate investors into our real estate endeavors and we want to do it the right way. Any information is much appreciated.