I have an investor who buys rental properties located in economically weaker neighbourhoods, puts sweat equity in it and rents it out.
He has a proposition for me. He wants to sell 25% ownership in a rental home($20K value) for say $6,500 and retains 75% ownership for himself. Monthly Rental amount is split 25/75.
If we assume, average rental is $700 a month that results in $175 monthly check for 25% ownership.
Apart from investing(say $6,500), I don’t have to invest a single additional penny since the contract calls for the 75% owner to pay for insurance, property taxes, maintainence etc and also, I have no say in tenants, when to sell etc but if the rental home gets sold for whatever the value then I receive 25% of the proceeds.
Seems like a good deal but are there any pitfalls?
I’m wondering if the investor is using you for his down payment. 25% down is a pretty average percentage. I’m wondering if he’s trying to get the down payment money from you so he can get additional houses with no initial funds out of his pocket except for rehab. My question on this deal would be how successful has the investor been thus far? Just wondering if he’s going to be able to cover all associated expenses with the property with only 75% of the rent since you don’t pay for any expenses. If he’s been investing for awhile and has done well thus far, this could be an interesting way to get some cash flow and be hands off on the investment.
Get everything in writing!
Well if he is asking for 6500 that’s 32.50% of the purchase price. I’m Bot sure how you are getting your $175 the only easy would be off of gross rents. At the 50% rule you’d be looking at $87.50 a month on net profit. Which puts you at 6.25 years to profitability on rents. Your annual ROI would be 16.15% which is not bad. But if you’ve got the down payment for a 20k property why not just buy it yourself and cash $300/mo? Which would give you a roi of 55.38%!
Of course as you say these are all assumptions, and we all know what happens when you assume.
Yes completely agree with you, this money will most likely be used for the down payment for buying the new property.If this is the case then mortgage responsibilities are going to be shared. If this fact is kept hidden by the majority share holder and the property is foreclosed because of non payment then what happens?