How should I structure my RE investor partnership?

3 Replies

Hey Guys N Gals! 

So, my father and I are planning on investing in real estate together in Cincinnati. He is retired in California and is happy to get more money back on his return and help out me and eventually hand off some of his equity to my siblings. I have 9 years experience in property management and residential sales. My girlfriend and I will be moving to Cincinnati to pursue an MBA and want to buy a small multi-family. I have about $15K cash and could leverage at most $65K. However, I will not be able to qualify for a mortgage on my own. We are looking at multi families under $100K. The plan is for me to essentially be the manager of the managers on the ground. I will assist with demolition, manage rehab and manage on my own. My girlfriend will inevitably be pulled in for a fair amount of work (and she isn't afraid to do so) but she has no money to put in. My father and I agree that he and I should be the only ones with input for the direction of the property and others can have equity positions. However, he can sometimes be a bit of micromanager. For simplicity, assume a $80K 4plex with $40K rehab. 

My biggest concern is that I want to have at least a 50% say in the property in which I live in. 

How do you think my father and I should structure the partnership? 

     I've read about the 30/50/50 split and the 50/50 split 

How should my girlfriend be compensated? hourly rate? Given a minor equity position? 

If my father is going to gift some of his equity position to my siblings and I am going to manage the property, what is an easy way to do this? 

Sidenote: we almost put a bid in on a monster 29 unit building for $375K but decided not to because the numbers didn't quite pencil out. I was also a bit hesitant because I want to avoid becoming an employee. 

Thanks for your help everyone! 

Hi Ben,

It sounds like your Dad will be investing most of the money so your investment is what we generally refer to as "sweat equity"

Partners have two types of accounts - a capital account and a profit & loss (P&L) account 

In a family setting, you and your Dad could both be 50/50 partners subject to some economic carve outs

For example, your Dad can receive a preferred return (say 6%) with your return kicking in after that

Example: assume your Dad invests $50,000 and the cash flow for the year is $6,000 - the cash flow is  credited equally to both of you since you met the preferred return target of 6% for your Dad

If the cash flow was $5,000, then $3,000 is credited to your Dad and only $2,000 is credited to you since the preferred return comes first

You will probably set this up as an LLC so no one has personal liability

If your Dad will agree you can be the managing member so that you can make all or most of the decisions

Sorry for the long reply but there are a lot of ways to cut up the pie in a partnership

Thank You for the long reply! I like the preferred return idea! 

@Ben Gammon , because partnerships (I use LLC's or any multi member entity when I use Pship term) can be tricky, make sure you have a good Operating Agreement that not only spells out you as Managing Member or Administrative Member, but also how any future contributions (additional equity or other capital that would/could be added to the entity) will be treated. Since you have siblings, you would hate for a sibling to throw a turkey leg across the Thanksgiving table because they were not treated as fairly by good ole Dad as you are being treated. Look at major categories of discussion in such a document. Make sure that dad understands that this could be an illiquid investment for some time (I am sure your dad is smart, but you ALWAYS want to talk through Goals and Objectives BEFORE signing). You just never know. Trust me. Been there. Doesn't matter if you under or overachieve.

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