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Partnering for "buy and holds"

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Steve Babiak

Real Estate Investor from Audubon, Pennsylvania

Feb 18 '13, 08:46 AM
1 vote


@Bill G. - maybe you meant one of these posts from John Chapman? (BTW - there are multiple BP members named "John Chapman".)

http://www.biggerpockets.com/forums/52/topics/75182-llc-or-sole-prop?page=1#p440434

http://www.biggerpockets.com/forums/67/topics/76244-flipping-properties-without-llc?page=1#p450416

http://www.biggerpockets.com/forums/109/topics/73385-liability-idea---property-in-my-name-but-managed-by-my-llc?page=1#p423965

One good reason for the multiple LLCs approach as advocated by @Frank Gallinelli - it sounds like the OP might have different partners for different properties. Rather than commingling funds and ownerships, separation using distinct LLCs could have some benefits.



Steve Babiak, Redeeming Properties, LLC
Telephone: 6109082183
...


Frank Gallinelli

Real Estate Investor from Southport, Connecticut

Feb 18 '13, 08:52 AM
2 votes


@Karen Margrave Since my company has analysis software (including partnership structuring) for developers as well as investors, we get to talk to these developers and see a fair number of the ways they try to put these deals together. Probably the only thing I can say with real confidence is that there is no "one size fits all" structure.

One approach that we do see very commonly is for the developer to charge the project a fee (or fees) for the work he or she does in running the project through to completion. Then the developer may test several possible splits of the final disposition to see is there is a stucture where the equity investors can get an adequate IRR and the developer can also get a reasonable "promote" over and above the fee income.



Medium_logo_realdataFrank Gallinelli, RealData
Telephone: 800-899-6060
Website: http://www.realdata.com
-- www.realdata.com


Bill G.

Real Estate Investor from Springfield, Missouri

Feb 18 '13, 08:57 AM
2 votes


Karen, I mentioned the equity based on contribution which is the custmary method.

As to your value, or the value of any partner, what I and others look at;

1. Money, this has two sides, first is the contribution to share the benefits, secondly, is the partner strong enough to suffer a loss, can they inject more if required, can the back up guarantees with thier check.

2. Experience, what's the track record in similar deals, is there a record of success or will one partner end up doing thier job and the other guy's?

3. Reputation, are they trustworthy, do they do what they say they will do? Are they known to be fair dealing? Will they work with you or will they see you working for them, how did they work with others?

4. Assets and liabilities, financials good? If you take every cent from them to make the deal, (1. above) and they have difficulties elsewhere, will they still perform or will they run, will they try to pull more out due to other losses? What liabilities do they have, judgments? Liens? Large obligations comming due? Contingent liabilities, are they involved in other risky ventures where they may get in a bind?

Tie these aspects together and weigh the value of thier participation. How bad do you need them, do you even want them?

Besides the money contribution, what would the services cost to do what a manager might do? Level of knowledge required. Would you need a CPA or could an account do it, what's a construction forman get, need a mortgage borker, what would that cost, is your partner well versed enough to keep you out of your attorney's office? Then, what % of time might be spent in each aspect of the duties?

As to work performed to earn your way in, what does it cost to hire out those functions? If all I get is a construction supervisor and I'm doing the deal, I doubt I'd give any equity as I can hire construction management and a mud boss.

Most investors over value what they actually bring to the table. Some may do a good sales job saying they can do, but when it comes time to crack the nut they are exposed, if you are the majority capital guy always make sure you can dump the other partner, to some extent, to get the deal done, finished, hiring out assistance. Remember the golden rule, he who has the gold makes the rules!

Be realistic, your services are based on you experience, abilities to perform and track record. So, Karen, if you have cranked out 28 medical buildings on time, on buget and sold or leased them up as expected, I'll look at doing number 29.

Now, to reality, the best partner is the one who doesn't need you, but wants you. One who can take up the slack if needed. Those are few and far between.

When you need a partner, you're at a disadvantage. If you're new don't blow smoke, but make up for it with effort, search for answers from good sources, be able to make sound decissions. Much of your return should be, in part, your education, paying your dues, having the opportunity to establish that track record. Consider that as well in the valuation of your contribution in a partnership.

If the other party is about as green as you, then you're on equal footing. Good luck!



Bill G.

Real Estate Investor from Springfield, Missouri

Feb 18 '13, 09:07 AM


Originally posted by Steve Babiak:
Bill Gulley - maybe you meant one of these posts from John Chapman? (BTW - there are multiple BP members named "John Chapman".)

http://www.biggerpockets.com/forums/52/topics/75182-llc-or-sole-prop?page=1#p440434

http://www.biggerpockets.com/forums/67/topics/76244-flipping-properties-without-llc?page=1#p450416

http://www.biggerpockets.com/forums/109/topics/73385-liability-idea---property-in-my-name-but-managed-by-my-llc?page=1#p423965

One good reason for the multiple LLCs approach as advocated by Frank Gallinelli - it sounds like the OP might have different partners for different properties. Rather than commingling funds and ownerships, separation using distinct LLCs could have some benefits.

Thanks again Steve!

I was not aware we had more than one JC but not surprised, my appoligies to all the other Johns.

A well written Operating Agreement accounts for multiple members being restricted to certain projects, the capiatl accounts for each memebr, any loans, responsibilities to manage or perform, as to voting or restricted from voting, pledging assets as well as indemnifications to the LLC and any or all members, so there is no advantage, especially with insurance.

Thanks again for the links! :)



Karen Margrave Moderator

Developer from Orange County, California

Feb 18 '13, 09:20 AM


@Bill Gulley and @Frank Gallinelli I'd say you covered all the bases! I think we may have taken it a little further than the orignial poster needed, and helped further all of our educations on the subject. Thanks guys!



Medium_tmg2Karen Margrave, The Margrave Group
E-Mail: [email protected]
Telephone: 949-933-3955
Website: http://www.themargravegroup.com
Licensed Brokers & General Contractors R.E. Developers (Parlay Investments). Orange County CA


Ned Carey Moderator

Wholesaler from Baltimore, Maryland

Feb 18 '13, 09:29 AM
1 vote


Just seemed to me that 50/50 split wouldn't be all that appealing.

I have to strongly disagree with @Tim Delp. An investor shouldn't care, (nor should a buyer of a wholesale deal, although they often do) what the split is. What is important to the investor is what is his or her return for a given perceived risk vs. what other investment opportunities are available to them.

I would not take a 50/50 deal because I can find and manage deals as well as you can. However your neighbor may feel his next best option is a bank CD at 3%. If the neighbor perceives you as an expert and looks at real estate as a good and relatively safe investment they may choose to invest with you for a 4% return. They may be thinking more in terms of long term appreciation and tax advantages.

On the other had they may think investing with you would be high risk but they have some high risk money available. and would want a 25% return. The bottom line is your cut isn't important. What is important is what they get out of the deal and how it fits their needs.

@Karen Margrave

Bill Gulley . . . I'd love to see you . . .comment on it more!

Bill Gulley has 8,000+ posts. You want him to comment more? LOL



Medium_crab1_copyNed Carey, Crab Properties LLC
Website: http://baltimorerealestateinvestingblog.com/
http://baltimorerealestateinvestingblog.com/


Frank Gallinelli

Real Estate Investor from Southport, Connecticut

Feb 18 '13, 11:30 AM


@Bill Gulley Thanks for filling in the blanks on the LLC issue. I was unaware of the backdoor vulnerability. I've learned something today -- so now I can take the rest of the day off ;)



Medium_logo_realdataFrank Gallinelli, RealData
Telephone: 800-899-6060
Website: http://www.realdata.com
-- www.realdata.com


Leo Cao

Baltimore, Maryland

Feb 18 '13, 11:40 AM


In pooling the opinions expressed so far, viable approaches run along these two main types

1) If equity partner is supplying less than half of the full acquisition + prep for rent/sale, then it's usually better to treat it as a private loan with a set return, secured or unsecured pending individual circumstances.

2) If equity partner is supplying nearly all the upfront costs, managing partner charge a fee for services (one-time general contracting/labor fee to prep [5-10k] and ongoing management fee).

In case 1, managing partner holds title, case 2 equity partner holds title.

This is based on the premise that sharing control of a rental real estate is usually a headache, so either hold control as the managing partner and pay interest, or let equity partner call the shots and charge them for service rendered.

This is for deals under 100k, higher numbers a formal partnership or setting up LLC with operating procedures and buy-out provisions would be necessary.



Tim Delp

Real Estate Investor from Jacksonville, Florida

Feb 18 '13, 11:41 AM


@Ned Carey I agree with your disagreement with me. I think the problem that investors run in to is that the investor that is typically sitting in cds making next to know money values the preservation of capital and lack of rish inherent in fdic insured cds. Certainly they are losing purchasing power due to inflation. I agree that investors will look at their return on capital invested and analyze the perceived risk in whether they should invest. I'm not sure what kind of return's the poster is able to deliver but just as you wouldn't do it because you can do it yourself each investor is going to have their own level of risk they are willing to assume and i don't think too many cd investor are going to begin to speculate on buy and flip or buy and hold real estate. When I was saying I don't think 50/50 split was fair I'm thinking in terms of investors willing to speculate on real estate deals, but you are correct it would depend upon the expected return and perceived risk.



Ned Carey Moderator

Wholesaler from Baltimore, Maryland

Feb 18 '13, 11:51 AM


Originally posted by Tim Delp:
Ned Carey I agree with your disagreement with me.

Now I am confused LOL

the investor that is typically sitting in cds making next to know money values the preservation of capital

Agreed I used CDs just as a way to illustrate the point; not as an example of what would be typical.

When I was saying I don't think 50/50 split was fair I'm thinking in terms of investors willing to speculate on real estate deals, but you are correct it would depend upon the expected return and perceived risk.

I think we are on the same page. I was writing for the benefit of others. When you make any kind of offer you need to think of how the other side will evaluate it, not by what is perceived as fair.



Medium_crab1_copyNed Carey, Crab Properties LLC
Website: http://baltimorerealestateinvestingblog.com/
http://baltimorerealestateinvestingblog.com/


Jim Ingersoll

Real Estate Investor from Richmond, Virginia

Feb 18 '13, 12:34 PM
1 vote


I am buying and holding using a joint venture. I do all the work and my private lender is completely passive. We split incoming rent and the future equity 50/50. It is not hard to find JV partners when offering the equity participation.

Jim



Bill G.

Real Estate Investor from Springfield, Missouri

Feb 18 '13, 01:27 PM


Jim, that's common, been there done that. It's a win-win even for the mid level type managing investor types, not just starting out. It depends too.

Frank, you can do some really good stuff in an Operating Agreement, like having members as preferred stockholders and common, in concept...spliting voting rights, having other events of withdrawl and indemnification agreements.

Jon and Tim are on the same page, and Tim's mention of "speculation" a very good reason to partner is to limit losses and when much higher profits can be had, spliting the upper end for the comfort of the lower end is good thinking!



Bryan Williamson

Columbus, Ohio

Mar 17, 12:33 PM


I searched for this topic to see what others thought because it's easy to have an unfair split. I'm looking to an JV partner for his experience and his money for my first deal. Columbus landbank has properties that are dirt cheap. ARV is somewhere between 70-120k. Large difference I know but can't tell just from zillow. But it's in the ball park. Purchase price is 6100. The repairs prob will be in the 30k range. The repairs is what we need help wit as well as the know how to execute a full reno. If he fronts the money, we'll refi after completion and give him basically a wholesaling fee. At least that's what I believe the agreement will be. We touched on it briefly. Hopefully this gives someone another idea on creative financing.



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