What is a reasonable return to pay an equity partner on a real estate deal such as an apartment acquisition?
How about the percentage of ownership? Should it be a reflection of their percentage of cash in the deal?

What is a reasonable return to pay an equity partner on a real estate deal such as an apartment acquisition?
How about the percentage of ownership? Should it be a reflection of their percentage of cash in the deal?

You will have very different answers from people depending on who you talk to {depending on whether or not the person has the money or has the lead on a deal}. Personally, I think that most of the spoils should belong to the person putting up the money. I do not discount the “blood & sweat” equity specially if you are going to be managing the property, but the partner not putting up the money should get compensated in a manner that is not out of order with the money that a management company would get if it was providing the service.

If for example the equity partner was putting up 100% of the money and this amounted to $100,000, and it was assumed that paying someone to manage the property was going to cost about $1,000 a year, an agreement could be reached where the other partner would get anywhere from 5% to 10% of the property ownership.

This method that I just thought off has a couple of problems such as the fact that doing it without safeguards means that one partner could just get equity for doing nothing if he fails to perform. Therefore, creating an agreement where the equity is distributed over time would be the best thing.

I guess this answers the question regarding the return to pay on equity. Once you start limiting the return of equity to a fixed interest rate, that equity is becoming more like dabt than ownership.

The situation that I envision is that on a 100,000 property for instance, I would get the loan for 80% LTV and the equity person would put up the 20% in cash to pay the seller. Defining ownership ratio and or returns to the equity person has been my problem.

Being on the lending side I would want to know more details on the 20% "equity" contribution, particularly, is it really equity or is it 'borrowed' equity (i.e. 3rd pty equity that has repayment terms, etc). In the case of borrowed equity I would attempt to limit all repayment and or dividend repayment of the 20% portion until I received my money.

The VC folks in my shop tend to look for a minimum 30% return on investment with a strong exit strategy (I work for a gov business development agency ... I suspect that the private / commercial VC's would be seeking more.)

Just a few thoughts from the cheap seats.

Cheers,

If you or an entity owned solely by you is going to be the one purchasing the property and borrowing the money to finance the purchase, it would be wise to consider the following:

1- Any owner of the property or the entity owning the property that has a substantial interest {think around 20%} will be required to guarantee.
2- If your own financial strength is limited, this might make the deal difficult to finance.
3- Any debt that will be repaid from the property will need to be taken into account when calculating debt service.
4- Any loan given to you personally or where you are contingently liable will need to be disclosed when filling out a financial statement {unless is a personal financial statement form that is not properly created)
5- The amount of equity or return that the investor is willing to take is dependent on negotiation.
6- The 30% return that Rick’s mentions sounds about right for a strong startup business deal {operating cash flow}, but for real estate it sounds a bit high.
7- The money from the investor could come in the form of a loan secured by a junior mortgage, just need to find a bank that is ok with it and a property that cash flows.
8- If the money invested is not big and it can be obtained in the form of an unsecured credit, you could just take it that way and list it as a personal loan in your PFS.
9- As a creditor’s analyst seeing a $20,000 balance as personal debt does not make me nervous on a regular Joe’s PFS. Seeing $100,000 would make me question what that is.
10- On the other hand seeing a $20,000 personal debt when your total assets are close to $20,000 and the amount of down payment would be $20,000 and the individual has no source of income would make me weary. My point = it is all relative.