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You have found a property in a desirable neighborhood where property values are on the rise. Current rent rates can generate a positive cash flow for you and a few minor home improvements could even justify a rent increase. However, the seller won't budge on price or terms.
Since you don't have the cash or credit to swing the deal, do you give up on it, or consider joining forces with other investors? Consider the latter. In real estate, the right partners can help you accomplish your goals. Financing alternatives
One partnership option, called debt financing, involves borrowing money from fellow investors to purchase the property. You benefit by purchasing the property and your partners earn interest on their loan. Offering a higher interest rate might well encourage an investor to join your venture, but the downside is that it will reduce your cash flow.
If your partners insist on becoming more involved in the investment, equity financing may be more attractive. In this case, you can share ownership of a property and not have to worry about paying interest on a loan. However, you will have to determine how to share the profits with your partner(s).
While these options sound attractive, you may be worried about your ability to find a willing investment partner. The truth is, many people today feel much safer investing in assets such as apartment buildings and homes than a volatile stock market. Ask friends, family, coworkers and neighbors if they have ever considered investing in a real estate partnership and you might be truly surprised at their level of interest in this idea.
Todd Saracki, a New York real estate investor, struck up a conversation on the golf course and found he had more in common with a fellow golfer than their love of the links. "We were both investing in real estate and realized that we could combine our buying power," Saracki explains. He went on to make many profitable purchases with his new golf buddy/investment partner. Putting it together
Structure the partnership to best meet your needs. If you invest your own funds, you could arrange for a ownership interest proportionate to the amount you put in, referred to as an "interest in return for capital contribution."
In this case, your level of participation in the investment profits, losses and cash flow would be at a fixed percentage.
Your ownership interest would generally be subordinated if acquired as "compensation" for finding the property and putting the transaction together. That is, you would not share in any cash flow until your partner(s) have received their agreed-upon annual return on their investment (for example, 10 percent per year). At the time of sale, the same arrangement would apply. You would not share in any proceeds of the sale until the entire investment of your partners have been returned to them.
If you decide to manage the property, you should charge a management fee. The fee you collect for management of the property would be over and above compensation you receive as a partner.
Beginning investors may want to consult with a real estate attorney and tax professional on their initial deals.
When you are considering a partnership, weigh in all of the value they add to investment opportunities vs. the complications they may potentially cause in investment management. Remember to pick your partners carefully.
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