How To Calculate ROI (Return on Investment) for Purchasing Real Estate With A Partner
In this blog I look at a real condo that is for sale right now in Waikiki, and calculate whether it is worth buying with a partner.
In the scenarios below, I look at 2 specific tactics that a partner may be interested in.
All the scenarios are based on the fact that I can put up $50,000 cash max, and the partner puts up the rest.
Also, we are assuming that the property is going to be used to run an AirBnB business, and that we are hiring a manager to do that for us.
Go through the calculations below and let me know if you have any questions!
CONDO INFO – 1 Bedroom / 1 Bathroom / 1 Parking in Waikiki, commercial zoning, 454 sq ft, asking price is $235,000
SCENARIO #1 – 50 / 50 Ownership – Buy Cash and then Refi
So I did a scenario where I find a partner for $200,000, and we put in a cash offer for $225,000.
Then I take my remaining $25,000 and renovate the condo (since it needs renovation and furnishings).
We have 50% / 50% ownership. I call myself the DEAL MAKING PARTNER because I’m the partner who does all the leg work, finds the deal, etc. The other partner is the CASH PARTNER because they put in most of the cash, but don’t have to do any of the work except sign papers.
CASH PARTNER w/ $200,000
DEAL MAKING PARTNER w/ $50,000
$235,000 Price
OFFER $225,000 CASH
50% ownership each partner
$200K Partner fronts most of the money
$50K Partner does all the work, found the deal, do the renovations, create the business, and get a mortgage after renovations
$25,000 upgrades
After renovation, the property is worth $250,000
Get $175,000 Mortgage @ 5% for 30 years, 30% Down Payment
70% of $250,000 = $175,000 which goes back to $200,000 cash partner
NOW
Partners have equity of $75,000 ($25,000 from CASH PARTNER, $50,000 from DEAL MAKING PARTNER)
TOTAL INVESTMENT – $75,000
$31.58/mo ($379/yr) Renter’s Insurance
$939/mo mortgage
$230/mo property tax
$593.51/mo maintenance fee
$36.60/mo internet
$50/mo supplies
$50/mo upkeep/upgrades
Total COST – $1,930.69/mo
25 days daily rental on AirBnB x $99 = $2,475
15 days parking rental x $15 = $225
Total Income = $2700 (without cleaning income before subtracting state tax)
Income/mo – excise/transient tax (14.962% = $403.97) = $2,296.03
Profit/mo = $365.34 ($2,296.03 – $1,930.69)
Profit/yr = $4,384.08
ROI $4,384.08 / $75,000 = 5.84%
Scenario #2 – 100% Ownership for Me, 1st Lien Position for Cash Investor (Mortgagor)
So I did a scenario where I find a partner for $200,000, and we put in a cash offer for $225,000.
Then I take my remaining $25,000 and renovate the condo (since it needs renovation and furnishings).
I have 100% ownership.
The cash partner is giving me a mortgage, and has 1st lien position, just like a bank. I send them mortgage payments every month just like a bank.
CASH PARTNER w/ $200,000
OWNER w/ $50,000
$235,000 Price
OFFER $225,000 CASH
100% ownership to the $50,000 partner
$200K Partner fronts most of the money as a mortgage loan
$50K Partner does all the work, found the deal, do the renovations, create the business, and get a mortgage after renovations
$25,000 upgrades
Get $200,000 Mortgage @ 4.5% for 30 years
TOTAL INVESTMENT – $50,000
$31.58/mo ($379/yr) Renter’s Insurance
$1,013/mo mortgage
$230/mo property tax
$593.51/mo maintenance fee
$36.60/mo internet
$50/mo supplies
$50/mo upkeep/upgrades
Total COST – $2,004.69/mo
25 days daily rental on AirBnB x $99 = $2,475
15 days parking rental x $15 = $225
Total Income = $2700 (without cleaning income before subtracting state tax)
Income/mo – excise/transient tax (14.962% = $403.97) = $2,296.03
Profit/mo = $291.34 ($2,296.03 – $2,004.69)
Profit/yr = $3,496.08
ROI $3,496.08 / $50,000 = 7%
Conclusion
After calculating 2 different partnership scenarios to buy this 1 bedroom / 1 bath / 1 parking condo in Waikiki, I’ve come to the conclusion that investing in this condo with a partner would not be worth it for me.
However, you can see all the numbers and you can decide for yourself.
Perhaps you hadn’t thought of partnership strategies in buying real estate before, so here are 2 different methods to consider.
Let me know if you have any questions in the comments, or opt into my e-mail list by CLICKING HERE and seeing how I help my clients become Financially Free faster.