Hey guys, hoping you can help me out here.
I’m purchasing a turn around MHP, and am bringing in 2 money partners to help with the down payment. Down payment will be approx. $150k. I’m asking each partner to bring in $60k, and then I’ll come up with the difference, $30k or so.
In your mind, what would be a fair cash-flow/equity position on this deal? It’s an out of state park, management is already in place, yet I’ll be doing all the work, communicating with manager, traveling out to the park on a regular basis, coordinating bringing in new MH’s, I’ve located the deal, done the due diligence, negotiated it, structured the financing, pretty much everything. My partners are going to sit back and pick up their monthly checks and an equity position at the end of the day. I’m thinking of a 50/25/25 split, or even a 60/20/20 split, but wanted to get some expert’s opinion on this and perhaps get an idea of what industry standard is? I don’t want to seem greedy, but also don’t want to short-change myself.
Thanks…
Jared (CA)
your guidelines. You are invested, although in a smaller portion, but you will be doing ALL the work. That is huge.
Do you just need their money, or do they bring added value to this transaction? As investors they deserve an honest split. You mention a 50/25/25 (with you getting 50 obviously)…I like it!
I am in two deals now. Number 1 is a 1/2M deal with 3 of us total. We split 1/3 of net profits each. The other is me and my biz partner TJ and hard money. 120K in hard money 5 points with 12.5%. (great money price).
Number 1 is over 1/2 done, number 2 is just starting (4 land homes).
Something else you need to think on is “who does accounting?”. I am doing figs on both of these deals and it kicks my …err well you see my point. It really stresses me out to think i might overlook a revenue or an expense, and someone gets shorted. Hard Money gets paid first every month every time. Partners depend on me to keep the funds straight. We have checks and balances in place…I do figs my partner cashes checks and reconciles statements and cuts all checks…works for us, but this is something to consider…I am up to midnite most nites doing accounting… anyone doing this can explain how tiring this is! I update Excel spread sheets and email to all concerned every time there is a change in value in the deal…even 1 dollar.
I really can’t over stress how important my hard money lender is to me…the deal is usually glanced over, but the investor is investing in the borrower (me).
That is an awesome responsibility…
Good Luck, come to MOM meet the Brenns and tour their Park!
Greg
I couldn’t agree more with Greg. The value the hardmoney and partners bring to a deal is invaluable to the hands on investor. We can only do so much with money we have but we can accomplish almost endless tasks with the proper use of other people’s money.
Their money must always be treated as more important than our own. Doing so brings more and more money your way.
Great post Greg.
Tony
I usually look at the total investment and
1)who arranges the deal
2)who signs for the loan
3)who put in the ongoing effort
Most of my investors are passive/active investors. They are informed of the current issues and vote on them as a member of the board of directors, but are not day to day management (some call two or more times a day!!!).
If the investor is passive I give them a pro-rata share of the total investment & priority return.
An investor who also is a corporate CFO and signs the loan papers has an increased interest and return. If we use their name (and good credit status) to sign for the loan they typically will get 5-15% of the stock.
As the person who has found the investment, arraigned the financing and will be actively overseeing the investment I usually receive 60-70% of the stock. This allows me a margin of error to sell more stock and still control the corp if I misjudged the investment or timing.
The investors
It sounds like your partners are completely passive. What is your exit strategy? That’s probably the most critical question. For now, I’ll assume it’s a long term hold for cash flow and equity growth. My personal situation with partners is very different. They bring a lot to the table and they are working very hard on the turnaround right along side me, even though I’m the one nearest the properties.
Here’s how I see it: You need your investors to get you into this deal, and that’s all. So get them out as quickly as you can.
If I were in your position I’d try to cash them out ASAP with a cash-out refi or if need be, your own money (borrowed from banks on a LOC, preferably, if you can’t do a refi) in two years or less. I’d be looking to give them a guaranteed 18% annually. I’d structure it so that 10% of that is payable as interest only on a quarterly basis, or however makes the most sense given your cash flow. Secure their money with a mortgage or deed of trust on that property or another that you own. Then when you do your cash out refi, pay them back their principal and an additional 8% annual interest, to bring their total ROI to 18% annually.
Their contribution to this deal is really too small to warrant a 40-50% equity stake, total, and I think they’ll be more anxious to fund your deals if you can pay them back reasonably quickly. Then they can play again on another deal. If the way I’ve laid it out isn’t more lucrative for you than giving an equity stake to your partners, or if you can’t afford to structure things the way I’ve suggested, then perhaps it isn’t really a deal.
My experience with local banks has been very good. I just closed on a purchase in July where we had two local lenders competing to finance it, and already they’re both asking me about cash-out refi’s. If you develop a good relationship with a local lender you can cash your partners out pretty quickly and do it all again on another property.
I’m happy to brainstorm on the phone if you’d like. Drop me a private email and I’ll send my number.
Lin
Thanks for sharing this!! Very interesting!
Lin
Lin, Gregg, and Tony, thanks so much for your feedback. I really appreciate it. I’ve found several investors who are loving the 18% annual return and have put a 100+ lot park under contract and will use none of my own money!
Looking forward to meeting you all at the MOM in Troy.
Jared