How do you typically structure a deal between two partners?

Question

I have a few people in my network that have offered to fund my next real estate purchase. What is a typical way to structure this that is fair? Let's assume I am the one finding the deal, managing the property, everything. They are simply writing me a check for the downpayment/rehab. Is 50-50 fair for equity? Or just straight loan with interest? Or a combo of the two? Thanks so much for your input!

Account Closed · Answer

Depends on how you want it. If you want a lender, you have 100% ownership, you make payments, typically it's 12% interest only payments and pay off the principal at sale or refinance of property. You bear the financial risk.If you want a partner, the profit may be 50/50 but ownership should be 51/49 so you can make decisons for the property that don't include a 2nd person. You will learn why that is important the first time you do a 50/50 ownership. If you have a capital partner, they need to be ready in case there is an cost overun or if the property doesn't sell or if you can't get future financing. They bear the financial risk.

Jace Bricker · Answer

Hey Jordan - I would always recommend investors think about forming an LLC for general liability reasons when working with partners as I do with my own properties. However, if you're looking for something structured specifically so that the other investor's duty is limited to putting up capital but not to make business/management decisions, I would go with an LP (Limited Partnership). Within the LP you will draw up an agreement stating who the Limited Partners are (those who are specifically part of the agreement to put up capital) and who the General Partner would be (the individual making investment decisions, management decisions, and directing capital of all partners). This provides less liability protection to the GP though.

Alternatively, if you know the person well you can also form a basic LLC (S-Corp typically recommended) and create an operating agreement which can hold the same idea above in binding agreement (would want signed & notarized + work with attorney to draft document).

I hope that's helpful!