Rookie Podcast 82: Rookie Reply: How To Split Finances in a Partnership/Joint Venture

Rookie Podcast 82: Rookie Reply: How To Split Finances in a Partnership/Joint Venture

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This week’s question comes from Jimmy on the Real Estate Rookie Facebook Group. Jimmy is asking a couple of great questions about those in partnerships going in on a property:

  1. How do we split the cost of buying a property 50/50 and keep the funds in one place?  
  2. How would it work right now as 50% of the money is with him and 50% of the money is with me? 

Many real estate investors will come across the same question that Jimmy has, especially since partnerships and joint ventures are common as you grow your portfolio. Both Ashley and Tony have partnerships and answers to these questions!

Here are some suggestions:

  • Lay out how the responsibilities, costs, and profits will be split
  • Use an attorney to draft up an operating agreement or joint venture agreement 
  • Set up a new joint bank account for each property you acquire
  • Make sure your assets are liquid before committing funds to a partnership
  • Follow “seasoning” regulations for any money put into the joint account
  • And more in the episode…

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Ashley:
This is Real Estate Rookie Episode 82. My name is Ashley Kehr, and I am here with my co-host Tony Robinson, and we are back for another Rookie Reply.

Tony:
I sure do love these Saturday episodes, Ashley. I like when we get a little bit of alone time, we can just talk shop and kind of dive deep into one of these questions that the rookies have.

Ashley:
And even though the episodes only run around 10 minutes, we actually spend an hour recording them because we end up just talking about real estate investing for half an hour before or after.

Tony:
All kinds of things in between. Yeah.

Ashley:
Yeah.

Tony:
So this is our chance to catch up and make sure we’re on the same page with each other.

Ashley:
Yeah. So do you want to go ahead and read us this week’s question? It is pulled from Facebook and from Jimmy Lou.

Tony:
Yeah. So Jimmy’s question is, and it’s kind of a two-parter, but it’s about partnerships. So his question is, “I recently decided to partner with someone who already has a pre-approval for financing, and we’ll be creating a partnership agreement and have an attorney look it over to finalize everything. We plan on splitting everything 50/50 in terms of down payments, closing costs, profit, expenses, et cetera. But with that being said, I do have a few questions about how financing in a partnership works. How do we split the cost of buying the property 50/50 and keep the funds in one place? Should we make a joint bank account, or what would you recommend? My partner is the one with the pre-approval letter. So it will be under his name.”

Tony:
So we’ll pause there because there’s a second half to this question. So Ashley, I guess I’ll let you take this one first. What are your thoughts on how they should set up their banking relationship with this partnership?

Ashley:
Okay. Well, my first question would be, are you going to create an LLC? What kind of pre-approval is this? Is it a preapproval for conventional, commercial, an FHA? So I’m assuming it’s probably a conventional or FHA, not a commercial loan since it’s under your partner’s personal name. So going forward with that, most banks will not allow you to put this into an LLC. So you’d be doing a partnership owning the property in your personal names where you could go ahead and do a joint venture. And I’ll actually have Tony talk about that more because he is more experienced with that than I do.

Ashley:
But in terms of splitting 50/50 on everything, you’ll want to have an operating agreement or your joint venture agreement stating that that is the case, 50/50 everything. Your partner can go ahead and purchase the property with the mortgage in their name, but they can still put you on the mortgage or on the property and you not be on the mortgage. So for example, my sister, she bought her first house hack a couple of years ago and she got a pre-approval for an FHA loan and it was in her name. So she went ahead and we found a property and she started the loan process and the loan was only in her name. My name is not on the loan at all, but we are both on the property deed. So we both own the property 50/50, and just the mortgage is in her name.

Ashley:
So, that’s definitely something that is possible to do. And you’ll just want to make sure that you have that operating agreement or you have a joint venture agreement stating the terms of what that means, why you both are on the deed.

Tony:
Yeah, lots of good stuff there, Ashley. And I guess I’ll comment a little bit on our joint venture agreement. So yeah, a lot of the short term rentals that we purchase, we purchase with other partners and we have a joint venture agreement that our real estate attorney drafted up for us. And in that joint venture agreement, it really outlines the formal structure of the partnership. So it talks about how profits are calculated, how profits are dispersed, talks about who has the ability to make major decisions regarding the property like selling or refinancing, talks about the ownership equity interest. It talks about the hold period. So there’s a lot of things we have in there to make it really crystal clear as we enter into that joint venture agreement about how we handle different aspects of the property. So I would definitely recommend, Jimmy, that you and your partner get some kind of joint venture agreement created as well.

Tony:
In terms of the actual joint bank account, since all of our short-term rentals are held in personal mortgages as well, we haven’t used a commercial mortgage yet. So we have like a business banking account, but we don’t really use it all that often. So we just have a regular joint checking account that all of our income and expenses flow through. So whenever we set up a new property, we set up a new joint banking account for that specific property. And that’s how we manage everything through there.

Ashley:
Yeah. And another thing too, about getting the joint venture agreement, because I’m sure after this airs, people are going to be asking you, can I get a copy of that? And it varies by state. And I highly recommend you go to your own attorney and ask for it, but ask them for a draft. My attorney did this for me and does this for me for tons of documents where she actually gives me her draft, her sample because really a lot of times attorneys just plug and play, okay, what’s the company name or who are the people that are entering into this venture together? What is the date that you’re doing this? What is the property address? So you can go through and plug all of the information in, and then you can send it back to your attorney and say, hey, how does this look? And you can just keep using it for future use.

Ashley:
So maybe the first time they’ll fill it out for you, you can go over it together, but any other time you want to do an operating agreement or a joint venture agreement, you have it for yourself. A lot of times you can probably do it faster than an attorney has time to do it for you too. So I highly recommended, if you have that option from your attorney, get a copy, just a draft of it and fill in those blanks going forward. And obviously still have them review it too.

Tony:
That’s a great piece of advice, Ashley. So yeah, that’s exactly what we did. Every time we partner with someone new, we’re not going back to our attorney to draft up a new joint venture agreement. Like we worked with her initially to create the template and then we just go through and fill in all the pieces whenever we close on a deal. And then, as we identify things we want to change or update, then we’re going back to our attorney to have her make those adjustments. But yeah, it will get expensive really fast if you went to your attorney every single time you had something like a minor change or adjustment.

Ashley:
And it’s really not that expensive to get these documents drafted one time. But like you said, if you keep having to go back and have them recreate it, it does. But it’s definitely worth that initial investment to have an attorney tailor it to you. You can get Tony’s draft, you can get whoever’s draft, but your business model might not be the same as theirs.

Tony:
Yeah, absolutely. So I want to get to the second half of this question. And Jimmy also asked, “When we purchase the property as a partnership, do we need to have seasoned money? How would it work right now as 50% of the money is with him and 50% of the money is with me right now? And do both of us need to have cash in our bank accounts right now, or is it fine if the money is currently an investment asset?” So there’s kind of two parts to that question. The first is like, how do you handle the cash to close if the money is currently split between two different people? There are a couple ways to go about this and we’ve used different kind of techniques or strategies.

Tony:
The first is that if you guys have a joint bank account together before you start shopping for your properties, what some lenders have allowed us to do is like, say that my partner is the one getting the mortgage, I just have to sign a document saying that my partner has access to 100% of the funds that are in that joint bank account. And that makes it that it’s both his funds that he can use as well.

Tony:
Another option that you can use that most lenders allow is that friends and family can gift money to their friends and family. There’s a limit, I think on how much you can gift, but depending on what your down payment is, you might be able to use that as an option to rightfully give that money to your partner as well.

Tony:
And then yes, the third option is, if none of those other options work, you can give them that money, let it sit in their bank account, but there is some seasoning period. I want to say it’s somewhere between 90 to 180 days. I don’t recall the exact timeline, but your lender should be able to clarify that for you. But those are some of the options that we’ve used in the past to deal with the money, not all being in one partner’s bank account.

Ashley:
Yeah, I think for the seasoning period, it’s common to be three months, but they really can ask for as many bank statements as they want for as long back as possible. So, I mean, that could even mean six months of bank statements to go through there. But also, another thing too, is I’m assuming that since your partner was already pre-approved that they do have the cash in the funds to show for the down payment. So maybe even it might not be an issue because they already have the funds available that the bank may not even look at your 50% or you might not even need to contribute your 50% right away because they have the funds available too.

Ashley:
And then the final, last part of that question is, is it fine if the money is currently in investment assets? As long as it is liquid, that is fine. You don’t even need to pull them out until you’re writing for closing, if it’s a liquid investment account. So not necessarily a retirement account, but if it’s just a brokerage account, you can easily pull those funds out. The bank is fine with that.

Tony:
Yeah. And we just did a whole episode on partnerships too. Right? I’m trying to look at the episode number. We’ll drop it in the show notes, but-

Ashley:
It’s episode 73, I think.

Tony:
73. There you go.

Ashley:
Go ahead and go to Real Estate to look up that episode. You guys can go to biggerpockets.com/rookie73.

Tony:
Yeah. So my partner, who’s my wife came on. Ashley’s partner Joe, who’s also her landscaper was on. No, I’m just kidding. Joe’s not her landscaper.

Ashley:
He’s my personal assistant.

Tony:
Yeah. There you go. Joe was also on the podcast and we spent like an hour just talking about partnerships, how they work, why we’ve both kind of leveraged them and the success and challenges that we faced along the way. So if you want a deeper dive into the world of partnerships with Tony and Ashley, head over to that episode there.

Ashley:
Well, thank you guys so much for joining us for another Rookie Reply. We will be back on Wednesday. You guys know the routine and have a great guest on. So thank you for joining us. I’m Ashley @wealthfromrentals, and he’s Tony @tonyjrobinson. And we will see you guys next time.

 

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