I have a question about silent partners specifically used for fulfilling financing requirements. I would like to know how these deals can be structured in a way that will benefit both parties.
For example, imagine there is a multi-family building for sale at a price of $1,000,000. There is an investor that is interested in this property, however, doesn’t have enough capital for the down payment, After networking, he has found an RE investor that will act as a silent partner and provide the 20% down payment ($200,000) to acquire the building. Also, imagine the property does cash flow at 100% financing at there proposed financing rate being 7% with 30 year amortization.
My question is as follows, how can these two investors structure this deal so it benefits both of them? Or, how are deals like this one typically structured?
This could be structured in an infinite number of ways. The silent partner could simply loan you the money which you would repay with interest. That would be best as you would get to keep all the profits.
You could also structure the deal so that the silent partner puts up the down payment and in return he is entitled to a certain percentage of the profits plus an equity position in the property. The real question is what are you bringing to the table? If he’s putting up all the money, what are you contributing to the deal and what is that worth?
Another BIG consideration is what your agreement should say about contributions if things go wrong! Things can and do go wrong! If the property becomes negative cash flow, who puts in the money to cover the deficit? This is where partnerships often get into trouble.
I have had partners in the past and won’t make that mistake again!
i agree with propertymanger.A partner is a good thing and works out most of the time as long as all parties know or think there butts are fully covered!!!
BUT yes what are you bringing to the deal would be my question as well it all sounds abit onesided at this point
Well, this situation is hypothetical. However, for arguments sake, imagine in this deal the active investor would take care of the day to day operations and manage the property, hypothetically, demographics since they live in different cities, dealing with the industry professionals (ex. accountants, lawyers, etc) , and I suppose the loan would be held in the active investor’s name.
Mike’s right on the money here. We could go on forever about hypotheticals to structuring this deal. But it wouldn’t even happen if you didn’t have some expertise to bring to the table.
800k @ 7% for 30 years gives a monthly payment of $5,325 (rounded). Annual debt service is $63,900.
The million dollar asking price has a nice easy cap rate of 10% or a $100k NOI.
So your NOI less your debt service is $36,100 to some how divide amongst the silent partner (SP) and yourself.
Another idea to structure this deal would be to instead of paying the SP interest on a second note or a percentage of all the profits for the length of ownership, to incrementally- buy out their share via cash flow. Or the monthly cash flow paid to the SP would all be considered interest on their investment and the recapture of their initial investment would come when you finally sell the property in 5 years. The latter would help you keep a lot of the cash flow for yourself. Since this deal by itself doesn’t have a lot of excitement, you could also structure it to be like a CD for the SP (SP’s are often very conservative as it is so this isn’t out of the question). Such as paying them nothing while you own the property and in 5 years paying them 300k back (50% simple interest).
If this property is a rehab or a “management rehab”, the possibilities continue…
P.S.- The 80% loan would most likely be held in the name of the partnership.