Posted by alex SC on December 13, 2008 at 15:25:24:
Just my two cents but I want every one to have equal skin in the game
Seeking Advice On Deal - Posted by Bob
Posted by Bob on December 12, 2008 at 09:23:29:
A friend of mine is an insurance agent for a nationally known insurance company. He has been in his current location for about 12 years. He has decided to expand his business and has purchased another agentâ??s book of business. He needs to open a new location for this business, however, and has asked me if I am interested in forming a company to purchase the office that the new book of business will occupy. The reason he is asking me this is that the purchase of the new book of business has maxed him out. If I decline, his other option is to lease an office.
The office we are looking at costs $160,000. I (only I) would put a down payment of $32,000 on the property and then we would finance the remaining $128,000. I would prefer that we each put $16,000 down, but again he is maxed out. At 6% for 15 years, it looks like the monthly payments would be $1,080.14. The insurance agency would pay a monthly payment of $1,585 for a cash flow of approximately $500.
I would collect the full $500 for the first 64 months, which pays back the $16,000 that I in effect lent him for the down payment, plus pays me $16,000. At this point the 15 year loan of $128,000 would be paid down to $94,900. Hopefully the office would have appreciated a few percentage points per year as it is on a main road in a good location.
My questions as to whether or not this makes good sense are as follows:
- We would be co-owners of the company that purchases the office, yet I am putting $32,000 into the deal on day one and he is not putting anything in. How is this structured in writing to protect me in the event the deal goes south?
- The ultimate goal is to sell the property after it has appreciated in value.
- What length lease would be typical for the tenant to sign?
- What if one of the two of us wants out? What are the mechanisms to facilitate this transaction?
Any comments would be appreciated. All Iâ??ve invested in over the years are stocks, mutual funds, and personal real estate (my homes). Iâ??m leaning away from this deal as I just donâ??t know enough about commercial real estate and the deal is fairly convoluted (to me). Iâ??ve known my friend for about five years and his insurance business is rock solid. The new book of business will very likely be a solid, long term tenant, and the location is great.
Thank You,
Bob
Re: Seeking Advice On Deal - Posted by brandoncbsre
Posted by brandoncbsre on December 14, 2008 at 11:01:08:
So I assume from the numbers that this will be a Triple Net lease. Otherwise the cash flow will not be near $500 a month.
The thing I dont like about the deal is that your partner is putting nothing in and getting half of any cashflow after the initial period, half of any tax benefits and half of any proceeds from the sale.
Why not just do the deal by yourself and sell it to him zero down on land contract. Make him responsible for paying taxes and insurance through a escrow account that you would have control over. Since he would buying it he would be responsible for the upkeep as well.
Set the interest rate higher and sell it to him for $5,000-$10,000 more than you are buying for. You didnt say whether the $160k was the asking or negotiated price. If it is the asking price, do your homework and drive the price down as much as possible.
Assuming you the $160,000 has already been negotiated then sell it to him $165,000, zero down on a 15 year amm at $1585/month which works out to 8.1% interest. It is a better deal then he can get elsewhere and you would earn your $500 a month cashflow and a nice chuck of cash when the note balloons in the future.
This would allow him to own his own building 100%, which I am guessing is what he what do provided he had the funds available. If you gives you a good cashflow and should be a hasslefree investment.
Consult your attorney and accountant to make sure you are protected. Let us know what you end up doing.