How to Build a Home With a Silent Investor
Buying or building a home requires real estate financing that can be difficult to obtain from traditional lenders. One solution involves finding a silent investor who will provide all or a portion of needed funding. This individual is frequently referred to as a sleeping or silent partner because of his behind-the-scenes role.
The Role of Silent Partners
The use of silent partners has become commonplace in both business and real estate projects of all sizes. For example, silent investors played a role in the development of Google and Twitter. Venture capital and real estate development have become two primary illustrations of silent partnerships for investors. If you plan to build a home either for personal use or as an investment property, a silent partnership is one financial alternative to consider.
Silent Real Estate Investors
Many banks have decreased their mortgage lending activities for both residential and commercial real estate. Additionally, construction financing involves financial risks that make traditional banking sources less interested than when seeking a mortgage loan for an existing property. If you are building a home and are unable to qualify for a traditional bank loan, finding a silent real estate investor is one solution. After locating a potential silent partner who is willing to provide construction funding, a critical step involves establishing financial and legal terms that satisfy both parties. For example, the conditions of the loan need to include the projected construction period and whether the investor will also be providing permanent financing after the house is ready for occupancy.
A traditional silent partner arrangement means the investor will not be involved or responsible for property management. Whether you are building a home or a restaurant, the basic investment principle is that a silent investor provides funding, and the other party manages the property and makes operational decisions in their role as a general partner. The financial incentive for a silent limited partner is usually a share of the profits. However, a silent investor also bears potential risks and could potentially lose all or a portion of her invested capital if anything goes wrong.
Business Agreement Needed
A silent partnership involving construction of a house involves a long list of financial and legal issues that should be confirmed in a written legal agreement. These aspects include profit-sharing, a date for the agreement to end, how to resolve any unforeseen difficulties and profit payments to be made by the managing partner to the silent investor. All parties will benefit from a preliminary due diligence review that includes potential risks, benefits and costs.
Stephen Bush is based in Ohio and has been a business finance consultant and writer for more than 30 years. Bush obtained a Master of Business Administration in management and finance at the University of California, Los Angeles.