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Rookie Reply: How to Structure a Real Estate Partnership

Real Estate Rookie Podcast
13 min read
Rookie Reply: How to Structure a Real Estate Partnership

This week’s question comes from Kurt through Ashley’s Instagram direct messages. Kurt is asking: We’d like to buy a vacation property with my brother and sister-in-law. My wife and I would handle the management while my brother would bring the down payment to the table. How do we quantify each party’s contribution when dividing profit and equity in the property? 

Real estate partnerships can be a huge help to rookie investors, especially for those who have the experience but lack the cash to invest by themselves. It’s important to note that real estate partnerships can be set up in any way you prefer?—as long as both parties agree that the split is fair?—you have full reign of your partnership structure.

Ready to partner up on a deal? Here are some suggestions:

  • Clearly define responsibilities so that both parties are happy with the agreement
  • Have a predetermined exit strategy for the partnership and property
  • Provide interest to whoever is putting down the money and pay fees to whoever manages the property
  • Set limits to when partners can use the property for their personal use (if it’s a short-term rental)
  • And more in the episode…

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Read the Transcript Here

Ashley Kehr:
This is Real Estate Rookie, episode 174.
My name is Ashley Kehr, and I am here with my co-host, Tony Robinson.

Tony Robinson:
And welcome to the Real Estate Rookie Podcast where what we focus on is those guys and girls who are at the beginning of their real estate journey, who are looking to get started, or maybe the looking to scale from one units to five, or anything in between. But every week, twice a week, we bring you the inspiration, the information you need to get started, or keep going. Ashley Kehr, what’s up? What’s new? What have we got going on today?

Ashley Kehr:
Well, I think we should tell everyone about maybe our phone calls that we just both got at the same time. So Tony and I had take a little break in between recording because we both got phone calls. Tony. Well, go ahead. Why don’t you start with yours?

Tony Robinson:
Yeah. So I’ve mentioned on the show a few times, we’ve been looking to buy some commercial kind of hospitality properties this year. And we’ve submitted several LOIs since the summer, but it finally feels like we’re inching close on one. So I got a text from the broker. He said, “Hey, Tony, please call me when you get a chance.” So I knew this was either good news or bad news. It was kind of in between. So we offered, I think, a little less than what the seller was asking for. So he’s saying if we can come up just a little bit, that he thinks he can make the deal work. So I got to go back and kind of double check our underwriting and see if we can make the numbers work.
We gave ourselves some cushion when we initially submitted the offer, but we just want to be diligent because this will be our first big syndication. And not even big, but it’ll be our first syndication. But I’ve mentioned before that buying a single family house and turning it into a short-term rental, I can do all day, but doing the syndication and raising money from a bunch of different folks is something that’s new for me. And even though I’m confident in my ability, there’s still a little bit of fear I think that I got to push past. So yeah, the data helps me sleep better at night.

Ashley Kehr:
Yeah. And that you’re being conservative too.

Tony Robinson:
Yeah. Right.

Ashley Kehr:
You’re not willing to push the envelope because you are using other people’s money and you don’t want to be as risky. So I think that’s a great asset of a syndicator who does do that, who doesn’t try to push it to the max.

Tony Robinson:
Yeah. But what’s funny about it is as I’m on that call with that broker, you step away and then you come back. So what was your phone call about?

Ashley Kehr:
Yeah. So mine is from actually an off-market lead. I talked to this guy two ago. A friend of mine had told me about a campground that his friend had stayed at. And he knew that the seller was interested in selling. So I found their website and I sent them an email just saying that I’d be interested in talking to them if they wanted to sell it. And so I got the phone call from them the other day. They told me more about the property and they were getting the financials together to share with me. So he called me back now to say he had his financials from the accountant and he was just pretty nervous about sending them to me. He didn’t want his financial information to go public or for me to spread it around, I guess.
So I tried to ease his mind on that I am a professional and I would never disclose. So I’m going to work up a nondisclosure agreement, sign that, and send it to him saying that basically he can sue me if I do disclose his information to anyone. And hopefully, that does make him feel a little more secure. He can show it to his attorney and have that available. But I really want to see the numbers before I even waste my time going out to look at the property because if we’re not even in the same ballpark, it doesn’t matter what the property looks like. I mean, there’s pictures and stuff online. I can already get an idea. So if the numbers don’t work now and before I even go and find more things wrong with it probably, then I don’t want to waste his time. So that’s why I’m trying to get the numbers beforehand.

Tony Robinson:
And Ashley, would you syndicate that deal or would you try and take this down on your own?

Ashley Kehr:
This property? Actually, he hasn’t specifically told me what he thinks he wants for it. So it’s kind of up in there, but I have an idea based on some things he has said. And I’m talking to a lender now about putting a mortgage on it. And then I would like to try to get a private money on the down payment instead of doing a syndication deal. But if it ends up that can’t happen, then I’m actually going to take it to a capital group that does syndications on campgrounds and see if they would like to give up some of the GP with me bringing them this deal. Then my last option would be me doing the syndication on my own.

Tony Robinson:
Well, can we talk a little bit? So why go the route of giving up some of your equity with this other person that knows campgrounds as opposed to syndicating it yourself first?

Ashley Kehr:
When I started in real estate investing, I gained all of my experience for working from somebody, and I learned so much. And I think that has been a huge value to me. And I think that I am a better learner when I kind of have a little sense of security. And so for me, when I worked for another investor, I was learning everything because it was his properties. And there was a little guidance, not a ton, but I would love the opportunity for at least one deal to give that up to work with another capital group, to learn the ins and outs of what they’re doing. You know? I always say on here, “There’s no reason to recreate the wheel.” So if I get the opportunity to be part of a GP with another capital group that’s doing campgrounds specifically, I think that would be a huge value add to me in giving up that percentage.
And I mean, you know just from you starting your first indication that it is very different than buying a single family home. And for me, I think it would be worth it to give up some equity on a property so that I can learn that system and process. And then, okay, maybe I keep going with another capital group and working with them, or maybe I go off on my own and start building my own. But I love the value that you can get out of giving up equity.

Tony Robinson:
So, so true, Ashley. And that’s especially like… So I guess, here’s the way to look at it, right? If this was the only commercial deal that you were ever going to do, then I can see why someone might be hesitant to give up some equity. But I’m sure your plan is this is the first of many. And if you can give up a little bit of your ownership on this first one to learn the robes from someone that’s done it time and time again, then when you go off to your second one, and your fifth, and one in your tenth one, now you’ve got the right foundation and the principles and the techniques and the strategies to make you successful in the long run. So there’s something to be said about being patient. God, I’m going off on a tangent now, but I feel like this is super relevant.
I was listening to a podcast yesterday and the host was talking about Jeff Bezos. And he was saying that Bezos was interviewed. And he said, “People… And this is Bezos speaking. He says, “People think I’m this genius, that I’m like this super intelligent guy,” which I’m sure he is, but he says, “A lot of what’s helped make him successful is that he has patient capital.” Is that if he’s planning for his investment to give a return in 10 years, he’s going to be able to beat the person that’s looking for a.
Return on their investment in three years. And he gave the example of space. Right? Like, think about space exploration. Like, who are the people that are competing with that? Jeff Bezos, Elon Musk, Richard Branson. Like, all these billionaires who know that there’s no money to be made in space today, but 10, 15, 20 years from now, it could be this really big industry. And obviously not everyone is Jeff Bezos and they’re billionaires, but I think if you can find a way to be a little bit more patient in your investing approach over the long term, over the long run, you might be able to find a little bit more success.

Ashley Kehr:
Yeah, Tony, that was great. Thank you for sharing that. And just to add a little bit onto that, even in episode 170 when we had my business partner, Daryl, on. And we talked about me giving up equity too for that. Like, him taking on things that I didn’t want to do, and how much more that was to me getting those things off my plate, and also that he is way more motivated to be the best that he can be at these different roles and responsibilities because he has ownership in it. So I think that as long as people are going to make great partners and you definitely want to vet them, like I would definitely vet this capital group as I’m sure they would vet me too, but those relationships can help you in the long run and really help you grow and scale; is kind of leveraging.
I’m not in a rush right now to make a ton of money off of one campground. And I think that’s even a greater risk of me doing my first syndication by myself is more of a risk in me partnering with another one. And I think that would even give a sense of security to any future investors I have that, “Look. I partnered with this company on this deal. I’ve learned what to do from them firsthand.” So to me that is an advantage giving up equity.

Tony Robinson:
Totally. Well, that’s not what we were supposed to be talking about today, but it was a good conversation. Right?

Ashley Kehr:
Yeah. Yeah.

Tony Robinson:
We still have an actual question to answer for all the listeners who’s all the rookies that are listening in today’s episode. It was not about mine and Ashley’s journey in commercial real estate. But we’ve got a question from a guest. You want to jump into that, Ash?

Ashley Kehr:
I mean, it does have to talk about partnerships a little bit.

Tony Robinson:
That’s true. Right? So there is some connection there.

Ashley Kehr:
Yeah. Giving up equity. Okay. So today’s question is from [Kurt Martig 00:10:15] on Instagram. He said, “Love the show. My wife and I are learning a lot from you and Tony. My wife and I own a short-term rental property and house hacked duplex, which we both manage where we live. Question for you both. We would like to buy a vacation property with my brother and sister-in-law. We would short-term rent it and also vacation together at the house. My wife and I would do all the remote management and my brother would bring the down payment to the table. How do we quantify each party’s contribution when it comes to dividing profit and earning equity in the property? Even though we’re not coming in with any cash, the ultimate goal would be that each party would have 50% equity in the property. How could we structure the agreement to that goal?”

Tony Robinson:
So Kurt, great question. Right? Because I think a lot of folks ask, “What’s the right way to structure the partnership and how do we make it fair,” and et cetera, et cetera. And the first thing I’ll say, Kurt, is that there is no right or wrong way to structure a partnership. And we say this all the time. At the end of the day, what makes a partnership work is that both sides are happy with the agreements that they came to. Right? As long as both sides are happy, then it’s a good partnership. But what I will say is that I think you’ve already answered the question, Kurt.
So the last thing you said is the ultimate goal would be that each party have 50% equity in the property. And you’ve already kind of laid out what the responsibilities are. It sounds like the brother is bringing the down payment. You and your wife are bringing the expertise in the property management. And in my mind, it is a very fair exchange to say, “Hey, we’re going to keep 50% for managing it on an ongoing basis. We’re going to pick up the phone when the guests call and complain about something. We’re going to be the ones managing the cleaners. When something breaks, we’re going to call the plumber. When the guest can’t find their check-in code, we’re going to send it to them. When we need to reorder sheets, we’re going to do that.” Right?
Like, you’re going to be doing all the day-to-day stuff that comes along with managing a successful short-term rental. Your brother, he’s going to put up the capital and then probably just of kickback and then enjoy the property whenever he’s out there. So in my mind, what you just laid out is a very fair and real way to structure the partnership.

Ashley Kehr:
Yeah. I think that’s great. And like you said, they already have their goal. They already know what percentage they each want. One unknown that we have that would be helpful: who is putting the mortgage in their name? Is it going in both names or different names? Because I think if you’re carrying on the debt, that’s going to affect your debt to income ratio. So that could come into play too. So that may be something to discuss with the other family.
Two things that I would do is, okay, separate it into the 50/50 partnership. But, and this is what I did with my very first partner in a couple deals, is for that down payment amount, I would set a note payable back to the family that’s paying that down payment and put maybe a little interest on it so that they’re getting that paid back to them and making a little money off of that percentage. Next, what I would do to the family that’s doing the proper management is I would pay them a property management fee. So this way, basically the other family’s making a little interest on the money they put into the deal. They’re getting their money back. You’re putting in work and you’re getting paid to do that work. It’s because I think down the road, you start adding these properties and you might not want to do the property management anymore, or you might want to outsource it, or it’s going to be more than you thought it was going to be.
So then you have… Okay. Then you stop getting that property management fee and you’re still 50% owner on the property. So when you’re taking on tasks that give you specific roles and responsibilities in a business, I like to divide out the equity however, but then you get paid for those roles and responsibilities. So if it’s not working out, if you can’t manage anymore, it’s not working remotely, it’s not affecting your percentage and you don’t have to restructure it because it’s still fair how you guys are in it even if you do outsource the property management. So I would do that. And then also I would set limitations or expectations on when it’s available for personal use. So Tony, I think you do something like that too with your partners.

Tony Robinson:
Yeah. We limit it to like the down season. Right? Like in Joshua Tree, that’s the summertime. Right? Like, we were really wan our partners using it during the summertime. In Tennessee, that’s like January. Right? It’s a good time to go out there. But you don’t want to lose a week of revenue during your peak season because I think that can be detrimental for everybody involved.

Ashley Kehr:
Okay. Well, I think that was a good question for this week and probably a fairly common question too that people have, especially when you’re partnering with a close friend or family member too.

Tony Robinson:
So let me add one thing before we wrap up here. One of the things we’ve recently started adding into our partnerships, which I also think helps me sleep a little bit better night, is a predetermined end date with the option to renew. So right now, for all of our partnerships, they have a term of five years. And the default exit strategy at the end of year five is that we sell the property. And the only way that the sale does doesn’t occur is if both parties agree to renew, and then it renews for another one year term. And then at the end of each subsequent year, we have to ask the same question. Do we both want to stay in this partnership?
And I think that makes it super clean and cut and easy if things are going wrong to easily walk away from the partnership, but still maintain like an amicable relationship. It’s an easy out, especially if you’re dealing with family. I think having an easy clean way out will help the relationship in the long term.

Ashley Kehr:
Yeah. That’s definitely a great point putting your exit strategy and making it clear in the contract too. And I like how you have it defined for a certain amount of years and what happens and how you decide what is going to happen too. That’s very clear cut. Okay. Well, thank you guys so much for listening to this week’s Rookie Reply. I’m Ashley @wealthfromrentals and he’s Tony @tonyjrobinson. And we’ll be back on Wednesday with a guest. Don’t forget to check out the Real Estate Rookie YouTube channel. See you guys next time.

 

 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.