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Katherine Earle
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New Partner Question

Katherine Earle
Pro Member
  • Rental Property Investor
  • Hart, MI
Posted Nov 8 2022, 09:49

I am about to purchase my first rental with a partner. I will be doing the property management for the rentals I buy with my out-of-state cash partner. Do I charge my "Property Management Company" a fee for the services and then split the cash flow and equity if we sell or buy each other out at some point? I will also be the agent, assisting with the purchase. Do I charge the normal commission on top of all of that or waive it as a personal transaction? It feels like I'd be getting the lion's share of the deal. He is a very generous man, but I don't want to be taking advantage of his lack of experience. 

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Kevin Sobilo
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Kevin Sobilo
  • Rental Property Investor
  • Hanover Twp, PA
Replied Nov 8 2022, 10:05

@Katherine Earle, I'm sure others will disagree but partnerships often go awry so I always view formalizing these details as being critically important to make things go well long term.

In my mind, I would usually think that a return on the partnership should be based SOLELY on the money invested. If you invest $20k and your partner $80k, then its an 20%/80% split.

Then, you pay directly for any work each partner does at the market rate. So, you get paid normal rates for agent/property management activities. If your partner paints a unit they get paid what you would have paid a handyman to paint it. The work may come and go and its difficult to know today what that work will be and what it will be worth a few years from now. So, paying each instance for the work directly just makes more sense to me.

In this way each person gets a fair return on their money invested an also for their work invested.

If you were only doing work here, I wouldn't even be a partner. Just bank money from the work and invest into a partnership on the next deal when you have money to invest. 

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Katherine Earle
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Katherine Earle
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  • Hart, MI
Replied Nov 8 2022, 10:30
Quote from @Kevin Sobilo:

@Katherine Earle, I'm sure others will disagree but partnerships often go awry so I always view formalizing these details as being critically important to make things go well long term.

In my mind, I would usually think that a return on the partnership should be based SOLELY on the money invested. If you invest $20k and your partner $80k, then its an 20%/80% split.

Then, you pay directly for any work each partner does at the market rate. So, you get paid normal rates for agent/property management activities. If your partner paints a unit they get paid what you would have paid a handyman to paint it. The work may come and go and its difficult to know today what that work will be and what it will be worth a few years from now. So, paying each instance for the work directly just makes more sense to me.

In this way each person gets a fair return on their money invested an also for their work invested.

If you were only doing work here, I wouldn't even be a partner. Just bank money from the work and invest into a partnership on the next deal when you have money to invest. 

I actually 100% agree with you. I have brought up more than once simply being the agent and property manager for him, but he wants to do it together. He has quite a bit of cash this would be an arrangement for several properties, not just 1 or even 2. He is really pushing the llc route.
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Ari Stern
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Ari Stern
  • Lender
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Replied Nov 8 2022, 11:28

@Katherine Earle, at first glance, I would ask yourself what you bring to the partnership. If your contribution is the management and leasing, then adding those fees as an expense, and then also receiving your share of the investment, seems like double-dipping. 

On the other hand, since you've already suggest to this investor that he purchase the property alone, and he hire you to do the management and leasing, and he wasn't interested in that arrangement, then clearly you bring more to the table than just those two functions.  

That being the case, since these expenses are legitimate expenses that the property would have incurred, whether you performed them or someone else, I don't see why you shouldn't be able to charge for them. 

With that in mind, I will second @Kevin Sobilo and say that however you decide to go about this arrangement, these details should be discussed and formalized beforehand.

One other thing you may want to keep in mind, is that you should look at your long-term relationship with this investor/partner. If you think there is a potential of him being there long-term, investing with you in future properties for years to come, then it might be wise to compromise slightly to ensure he's still making something when all is said and done.  Every investor expects a return on their money. And if you do end up charging for these services, and he ends up not making much after that, he may not be enticed enough to follow you to your next deal.

Lastly, from a financing perspective, since a management fee is a basic expense that every property has, even if you decide not to charge for these services, lenders will still include them in their underwriting when determining the NOI and value for the property. Depending on the size of the property, it's usually between 3-5%.

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Katherine Earle
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Katherine Earle
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  • Hart, MI
Replied Nov 9 2022, 12:45
Quote from @Ari Stern:

@Katherine Earle, at first glance, I would ask yourself what you bring to the partnership. If your contribution is the management and leasing, then adding those fees as an expense, and then also receiving your share of the investment, seems like double-dipping. 

On the other hand, since you've already suggest to this investor that he purchase the property alone, and he hire you to do the management and leasing, and he wasn't interested in that arrangement, then clearly you bring more to the table than just those two functions.  

That being the case, since these expenses are legitimate expenses that the property would have incurred, whether you performed them or someone else, I don't see why you shouldn't be able to charge for them. 

With that in mind, I will second @Kevin Sobilo and say that however you decide to go about this arrangement, these details should be discussed and formalized beforehand.

One other thing you may want to keep in mind, is that you should look at your long-term relationship with this investor/partner. If you think there is a potential of him being there long-term, investing with you in future properties for years to come, then it might be wise to compromise slightly to ensure he's still making something when all is said and done.  Every investor expects a return on their money. And if you do end up charging for these services, and he ends up not making much after that, he may not be enticed enough to follow you to your next deal.

Lastly, from a financing perspective, since a management fee is a basic expense that every property has, even if you decide not to charge for these services, lenders will still include them in their underwriting when determining the NOI and value for the property. Depending on the size of the property, it's usually between 3-5%.


 Thank you both for your input and yes, there is more to the backstory along with a 10-year friendship than just financial gain. I have talked to him in more detail about some financial goals that I can go to the cpa and attorney with now, where it will feel a little more balanced and less where I am taking advantage of a grieving widower. This is intended to be a longer-term partnership where we grow the portfolio to a size that will make a real impact on much bigger goals, in the name of his dead fiance, who passed away unexpectedly several months ago. It helps me get a clear idea of how I might form a partnership in the future though. So, thank you!

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Eliott Elias#3 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
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Eliott Elias#3 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
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Replied Nov 9 2022, 21:45

Split your commission and charge for property management 

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Drew Sygit#2 Managing Your Property Contributor
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Drew Sygit#2 Managing Your Property Contributor
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  • Royal Oak, MI
Replied Nov 10 2022, 05:09

@Katherine Earle most important step is to have a solid partnership agreement that details each of your responsibilities and covers what happens if one of you dies or wants out.

You should charge for your normal services. Important to create a papertrail to avoid future disputes.

You can then agree or choose to reinvest those fees back into the partnership.

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Katherine Earle
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Katherine Earle
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Replied Nov 10 2022, 05:29
Quote from @Drew Sygit:

@Katherine Earle most important step is to have a solid partnership agreement that details each of your responsibilities and covers what happens if one of you dies or wants out.

You should charge for your normal services. Important to create a papertrail to avoid future disputes.

You can then agree or choose to reinvest those fees back into the partnership.


 I appreciate the feedback. That’s actually what we are doing. I’m working with the attorney to spell out the details today!

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Jared Hottle
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Jared Hottle
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Replied Nov 10 2022, 05:38

#1 have open and honest conversations with him about your concerns of not sure what is fair. 

I have thought about doing this as well when people want boots on the ground and have money. What I always come back to is needing to property manage forever while they are extremely passive. Certainly they deserve it to be passive if they provide all the financial risk but I don't think its fair you will have to be the manager for the rest of time. 

The couple solutions I have thought of are you manage the manager and contractors as needed as well as be the point person when issues do arise. Make sure they are doing what you want and hire someone new if they are not.

Another solution is do not take a commission and do not charge an actual fee but put those on a spreadsheet what they would be each month and as soon as you get to the number he invested initially then have an agreement in place it is equal and you will hire a manager. The good thing about doing it this way is you save your partnership money in the critical first years and can make repairs and get rents up cheaper and easier.

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Basit Siddiqi
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Basit Siddiqi
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Replied Nov 12 2022, 16:56

What are you bringing to the table?
Are you bringing any of the capital to purchase the property?

What is your level of experience with property management?(Several years of experience, a couple years of experience, brand new?)

At the end of the day, you both should discuss what you bring to the table, and discuss what is an appropriate share of income allocation should be done between the two of you.