I have been diving in head first when it comes to real estate investing and have started getting some people I know excited about what I am doing. I have a friend who wants to get involved, have a 50/50 partnership, and I am wondering the best way to structure it (or if to even do it). Here are some details:
- He has capital, and has access to more.
- He has good credit, no mortgages to his name.
- He is extremely risk averse, which can be good and bad (In my opinion)
- He does not want to actively partake initially. Knowing him quite well, once we get a deal under our belt he will jump on full board.
- He has zero RE knowledge as of now
- He wants both of us to fund the projects
So where I stand - I'm comfortable doing a 50/50 partnership but I don't want to put in money for our first deal. The way I feel is I bring 50% worth of the deal to the table with my RE understanding, the work I would put in locating, negotiating, and securing a deal. I also have access to capital now, so I would essentially be giving half of my profits away if I find a good deal. On the flip side, in the future there would be more opportunity with the combined capital and work (he really will get into it once he starts making money).
Please let me know what you all think, the advice here is great and I want to make sure I'm not missing anything (good or bad).
You have one investment deal under your belt (according to your profile) and he is only asking for a 50% cut. Can you say winning the lottery?
If he has the capital and just wants a passive role, why not just have him be your private money lender and pay him an interest rate on the money he loans instead of giving up 50% of the profit when you'll be doing all the work?
I agree with @Cal C. . Finding someone who will fund you for 50% of the profit (if there is a profit) after your first real estate investment is quite fortunate. That said, if your friend will not be participating other than providing funding having him provide a loan secured by your next real estate project may be all the structure you need. You decide what interest rate works for both of you. You could add a profit sharing component if you desired (i.e. a base rate plus a share of the profit.) This would be a one deal agreement. If you need to modify it on future projects you can.
He only wants to fund half of the deal - so I would still be coming up with half the money.
Obviously that part wasn't clear. You might think about splitting profits between the work and the money. So if you do all the work and come up with half the money, you'd get 75% of the profits. But a better deal for him would probably be loaning you the money, that way he is not relying on a new investor to make a profit.
@Kyle J. nailed it.
Thank you everyone for the insight and advice. Here is what we decided upon:
- He is going to fund the deal 100%
- He is going to refinance, in his name, after we place a tenant and the seasoning period has passed
- He is going to receive a 0.75 point return for every month until the initial investment is paid (refinance).
- We split the profits and cash flow 50/50
- We then evaluate whether this is something we want to continue doing together or not.
I kind of blended a little bit of what everyone recommended, discussed with my friend, and this seems to be a win-win for the two of us and our goals. What do you all think?
Discussion and agreement between you and your partner is much more important than what some dude (like me) says on the internet! We just try to guide you as to what seems to lead to longer term partnerships.
@Mike Cowper congrats on striking a deal and best of luck.
@Cal C. - I know, but I can tunnel vision at times and get stuck on a thought or opinion. Another reason I think a partnership long term may make sense and why I ask crazy internet people (like all of us on BP) for their advice. Especially from people with experience and knowledge as I try to get some of my own.
Put it in writing and make it all legal. It would sure be a shame after all the work is done and he's refinanced in his name to tell you to take a hike. Or halfway through the process the two of you have a disagreement about something and you both lose. Money makes people do some weird things.
@Mike Cowper This might be expensive, but it makes it you and him very well protected, you make one LLC (LLC1), he makes one LLC(LLC2), then make another LLC (say MC&Friend LLC) the last LLC will be holding the deal, where LLC1 and LLC2 are the shareholders/owners. That way, if anyone encounters trouble in personal life, it will not affect anyone. Sure, it costs $$$/year, but it would be worth it.
Note: Trouble = unfortunate happenings like divorce, immobility, family control issues, accident, etc.
Plus, you could deduct business expenses, like gas, some food, home-office shared bills, formation expense, etc. The $$$ you spent might be recouped as a tax deduction and perhaps some more expenditures.
Na Na - That isn't a bad idea. LLC's are pretty cheap here in Michigan and that would add a layer of protection for both of us.
From what I'm hearing with my business ears (not REI ears because I'm a new Investor) it sounds as though he WANTS you but you don't NEED him. I'd say you're in the driver seat. I would structure any planned business in your favor based on you doing most of the RE work. If he understands business, he'll understand your proposal. Doing business with friends can be nice, it can also be a nightmare.
I have been on the other side of ventures like these but not in real estate with family. Keeping it "strictly business" from the outset has definitely saved me a lot of heartache. I'd say do a couple of deals where you both are comfortable with it being well known to each party that these are "test drives" with clear and "fair" terms for each. If they turn out as hoped, pursue the LLC route Man Dy suggested.
If it doesn't turn out as hoped, you can walk away feeling good and maybe give it another run down the road. Final suggestion would be to give a little if you REALLY want this to work and/or if you'd potentially need his capital down the road. Don't burn that bridge but don't give away your hard work if you don't need the capital.
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