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.
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