Equity Partner Wanted!

I am looking for an equity partner to replace my hard money loan on my waterfront property on 120' of saltwater frontage on a tidal bay of west Puget Sound.

I can work with two types of equity partners. One type is the person who can qualify for a $250,000 mortgage, but prefers to invest with NO money out-of-pocket. I pay the out-of-pocket expenses and do the work necessary to prepare an investment property for sale or rental. This works well for people that have good incomes from a job, are looking for additional tax deductions, but have limited time or funds to invest.

Another type of equity partner has funds to invest, but limited time or interest in being actively involved in real estate investment decisions. They prefer to loan out excess cash in exchange for a great rate of return, secured by a property with low Loan-To-Value ratios. In either case, I would be looking to secure either a $250,000 mortgage partner, or a $250,000 cash partner.

My mortgage partner would need to qualify as a 75% tenant-in-common owner. As the current tax-assessed value of the property is $378,000, a 75% share (LTV) would be equivalent to $283,500. In effect, I am selling a 75% interest for a discount of $33,500.

Exit Strategy:
I would pay all out of pocket costs for the loan, and cover all mortgage payments, ideally for a five-year interest-only $250,000 non-owner-occupied mortgage at less than 7%. Interest payments would be $1458 per month, plus $450 for taxes and insurance, for a total of approximately $1900 per month.

Option One - Straight Rental:
Rentometer estimates that the house will rent by the room for $1900 per month ($1300 upstairs with three bedrooms), and $600 downstairs (one bedroom), with shared kitchen. If the rooms were rented furnished, or if a small kitchen were constructed downstairs, it would be possible to achieve greater rental income. But this income, along with tax depreciation, should cover monthly payments. Owners would have 24/7 access to all common areas and any vacant rooms.

Option Two – Lease Option:
A tenant buyer would rent the house for $2400 per month, with $400 per month being credited towards the purchase price, which would be set at the current tax-assessed value of $378,000. They would have two years in which to exercise their option to purchase the house at this price. They would put down a non-refundable option fee of $5000 towards the purchase price (if they do not exercise their option, I like to offer $500 as a refundable security deposit as incentive to leave the house in good condition). I would split option fee, monthly income and tax depreciation with my mortgage partner on the same basis as our ownership interest: 75%/25%. If they paid monthly rent on time, rent credits would total $9600 over two years ($400 X 24 months). Hence, their effective purchase price would be $363,400 ($378,000 - $5000 option fee - $9600 rent credits).

I will split any profits over my original purchase price of $325,000 with my equity partner. Hence, my partner would receive an additional $39,750 at closing (in the example above), when the buyer exercises their option to purchase, assuming there were no other deductions for expenses or vacancies during that time.

In the event the tenant-buyer decides not to exercise their option, we keep all the funds they have paid to date (except for any security deposit refund) and we sell it again, using the same technique (only with a potentially higher sales price).

Because we are working with a BUYER as opposed to a traditional TENANT, we can expect them to cover most all maintenance and repair costs, and to take better care of the house than a tenant would, often making improvements that remain with the house.

This is the option I would prefer to pursue, but use the straight rental as a fall-back until we find a qualified lease-option buyer.

Option Three:
Sell the property today for the current list price, and pay my equity partner 2 points ($5000) for the use of their funds. The house would continue to be offered for conventional sale as we enter the busy summer season, and the equity partner would have the option to cash out if a conventional offer was received prior to a lease-purchase offer.

OPEN HOUSE ON EASTER SUNDAY FROM 2-4 PM: 2525 Rocky Point Road NW, Bremerton 98312. Live music, refreshments, and FREE lists of waterfront property priced under $400K! For more info on the house, see: www.2525RockyPointRoadNW.com

Why doesn't this buyer get a mortgage?

In today's lending environment, there may be many reasons why an investor could not or chooses not to qualify for a mortgage without a credit partner (or co-borrower). It may be because they are not a W2 wage earner, cannot document earnings (which may be invested in their company as opposed to being paid out as wages), or simply because of the difficulty in today's lending environment of receiving a stated income loan. There are new limits on the number of mortgage loans that an investor may have in their name, or requirements for debt to income coverage on their investment properties that limit their access to conventional financing.

However, with access to today's historically low mortgage interest rates, a savvy investor can generate enough rents and income to create cash flow on properties that may be expected to appreciate in value as the real estate market recovers. A solid investor partner should have no trouble covering costs of obtaining a mortgage for their credit partner, as it is much less expensive than obtaining hard money or other short-term financing.

In the next blog, we'll talk about the risks that a credit partner faces in working with an investor.

"I work full-time, but want to invest in real estate"

Think you don't have enough time, knowledge or resources to invest in real estate? Get started as a credit partner with a seasoned investor, using your good credit and documented income to co-borrow on a mortgage. Partnering with a full-time investor allows you to learn while you earn a stable income, until (or if!) you decide to become a full-time investor. Credit partners often pay NO MONEY out-of-pocket; their investor partner pays all fees and closing costs. The partners then split monthly income and proceeds from the sale of the property at some point in the future.

How does this work? How can I afford another mortgage?
Many people think that if they already have a mortgage, they could not possibly afford to take out another one. This may be true--if they are buying a second home or vacation property that generates no income. However, if they are buying an income property, lenders will consider the rental income in qualifying the borrower for a new loan.

If you already own property, you may be able to free up some cash for investment by taking out a second mortgage or a home equity line of credit (HELOC). A second mortgage at a fixed rate may allow you to invest in a long-term loan as a credit partner; while a HELOC may allow you to do some short-term private lending. Either option gives you experience working on real estate investments with a more seasoned professional.

How can I learn more?
Send for my free report on "Equity Partnerships in Real Estate Investing for the Full-Time Employee" by emailing HomeLandInvestment@gmail.com

Equity Partner on Lease Option Deal

So how would I approach an investor to partner on the lease-option deal described in the previous blog?

In my previous blog, I talked about how I would structure a lease-option purchase for a waterfront property listed for $325,000. In this blog, we will look at how this agreement would appeal to an investor and equity partner.

A conventional mortgage of $250,000 would be needed to replace a hard money loan currently in place on the property. So an investor/equity partner would be someone who was able to qualify for a $250,000 mortgage. As owner of the property, I would be listed on the loan with my equity partner.

The loan would be a conventional, non-owner occupied, interest-only loan, as we expect our lease-option buyer to be able to purchase the property from us in 2-3 years. We could also take out a fully amortized 30-year loan, if we had doubts about the ability of our buyer to exercise their option to purchase, or if we wanted to build in flexibility for future exit strategies. A fully amortized loan would cost us more, but interest only, with taxes of $308 and insurance of $50, would cost us $1800 per month.

If our buyer is paying us $2500 per month (see previous blog), then my investor and I are splitting $700 per month for three years ($25,200 total over three years).
I will cover all the costs of the loan out of the down payment provided by the buyer, so there is no cost to the investor to take out the mortgage—and they are making $8400 per year. In addition, as my equity partner, they get to deduct mortgage interest from their taxes and depreciation on our investment property. Since we are paying interest only, approximately $1440 per month of interest is tax deductible. In addition, they get to depreciate the value of the house (but not the land) over 27.5 years, further reducing taxable income.

As added incentive, I agree to split the net profit on the house over and above my basis of $325,000. So if the house sells for $337,000 ($357,500 less $12,500 as option fee and $18,000 in rent credits), we split another $8000.

So my investor/partner earns a total of around $29,000 over three years for their ability to take out a mortgage, an infinite return on their initial investment of $0. Not bad, eh?