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Account Closed
  • Plymouth, MI
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Partnership structure for buy and hold properties

Account Closed
  • Plymouth, MI
Posted Nov 16 2016, 18:44

I need some advice on structuring a partnership on buy and hold deals.

I am a new investor and have decided to partner up with a good friend of mine on starting our real estate journey. We both currently do not own any investment properties but have similar goals in real estate. We both want to acquire a portfolio of rental properties. Our target is the BRRR strategy but at the end of the day we are looking for solid assets that will cash flow.

I bring the drive, vision, and investing knowledge to the partnership while by partner works for a property management company so has experience with all tenant related aspects, is a licensed broker and has access to MLS, and has contractors he trusts (we have yet to use them for personal projects). We both bring equal capital to the partnership and do not have enough capital individually to execute a deal (currently).

We originally were going to acquire all properties in a joint LLC but decided that might get complicated in the future when either of our investment goals change. We have pivoted and decided that each partner would purchase a property individually with the other partner acting in a JV role.

We will still work as a team and help each other out with whatever needs to be done with each others properties.

My initial thoughts are to set the deal up where the partner not purchasing the property provides a sum of capital for rehab/purchase with a fixed return (10%?) and terms and also receives a percentage of the cash flow for help managing.

My question is:

How have people in a similar situation structured their JV agreements?

Are there any books/resources that I could read to learn more about structuring deals like this.

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Tito Burgos
  • Investor
  • Cliffside Park, NJ
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Tito Burgos
  • Investor
  • Cliffside Park, NJ
Replied Nov 16 2016, 19:56

@Account Closed I'm also looking to do the same. I have the investment knowledge and have owned a few individual properties but looking to own multifamily now and interested in partnering with others in a JV. I'll be interested to read what others post.

Good luck.

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Mark Rickert
  • Rental Property Investor
  • Albuquerque, NM
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Mark Rickert
  • Rental Property Investor
  • Albuquerque, NM
Replied Nov 17 2016, 07:11

Exciting times for you all!!!  Not to be the Negator but just go in eyes wide open.  I am not an attorney or a CPA.  Just my friendly input.  Consult with your attorney and CPA as they are the real experts. 

1.  Have an attorney setup a buy-sell agreement - This answers the question of "how are we going to get out of the deal if either of us wants to?"

2.  If money is needed, decide in advance where it is coming from and get it in writing.  For example,  new roof is needed.  What percentage is going to be paid by whom?

3.  No verbal agreements - Everything in writing and drafted by an attorney - Expect the best but plan for the worst

4. Setup a multi-member LLC, or some corporate entity with % of ownership spelled out. This will help protect your personal assets as well in case somebody sues you guys. Consult a real estate attorney that has experience in his/her own real estate investments.

5.   Hire an impartial CPA and Attorney - Don't use your buddies attorney as there could be a conflict of interest

6.  Get the tax advice from your CPA in advance of doing any deal

Good luck on your ventures!  

Mark Rickert

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Account Closed
  • Plymouth, MI
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Account Closed
  • Plymouth, MI
Replied Nov 17 2016, 17:39

@Mark Rickert Thanks for your input!

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Geo Gondzur
  • RE Investor
  • Houston, TX
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Geo Gondzur
  • RE Investor
  • Houston, TX
Replied Nov 21 2016, 22:20

Partnership is definitely not the way to go. They're easy to create but hard to get out of. With real estate, buy and hold specifically, you'll want to hold title in an LLC. I'd suggest using a series LLC. Consult an attorney in your state on how they work. Basically, if you're going to be buying multiple properties, you'll want to isolate each from the other assets in the company. The series LLC allows for this by placing a liability barrier between series Cell and assets therein. The series LLC also allows for different owners and profit sharing on each separate series cell. For instance, the main parent LLC may be owned by one person who has zero ownership interest in an individual series underneath it. This is accomplished by having a separate company agreement (with separate owners) for each series. The LLC holds the title, the company agreement delineates capital contributions and percentage of profit interest. You can take it a step further and attach a JV Agreement to the company agreement that lines out each party's duties with respect to each property. JV Agreements themselves do not constitute ownership. I'm not an attorney, but I wouldn't advise putting money into a property for anything without some form of ownership in return. JV Agreement by itself won't cut it.

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Scott Walker
  • Investor
  • Maplewood, NJ
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Scott Walker
  • Investor
  • Maplewood, NJ
Replied Nov 23 2016, 03:39

@Account Closed post I see the need to have a non bias attorney. This has been an interesting post and answers. Thank you @Uzair Irfan, @Mark Rickert, and @Geo Gondzur. I hope you all don't consider me bold for thanking you, but I have a meeting today with my partner to establish the very same issues. Thanks again.

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Josh Calcanis
  • Rental Property Investor
  • Orlando, FL
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Josh Calcanis
  • Rental Property Investor
  • Orlando, FL
Replied Nov 23 2016, 03:55

@Mark Rickert and @Geo Gondzur please jump in on this one. I just met with a local investor out here in Orlando, FL and he structured a few of his early deals (he now strictly works with commercial retail) with an investor with something called a 'waterfall' payment? It seemed like an intriguing way to go with an investor that you want to go in on buy and hold deals. 

The way it was explained to me was that the partner with the capital handles the initial DP and the other partner handles the work and cap ex. In the contract all earnings are split 70/30 (with the partner fronting the capital receiving the 70%) plus some interest. After the capital partner receives the agreed upon interest, the earnings split swaps or goes 50/50.

@Scott Walker I'm not an expert in this and haven't tried it yet, but it seems like a solid play if you don't want to use your cash up front. I also haven't partnered with anyone yet so I don't have the horror stories like these guys yet.

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Scott Walker
  • Investor
  • Maplewood, NJ
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Scott Walker
  • Investor
  • Maplewood, NJ
Replied Nov 23 2016, 04:11

@Josh Calcanis Thanks I will discuss several possibilities with my partner first and then with the attorney.

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Geo Gondzur
  • RE Investor
  • Houston, TX
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Geo Gondzur
  • RE Investor
  • Houston, TX
Replied Nov 23 2016, 05:23

@Josh Calcanis I think you should first decide with your investor as to how he or she would like to be involved. I always put it to my investors in the sense that they can be a "lender", therefore a "non-active" investor who is only entitled to an agreed upon percentage of interest on the their investment, or they become a "partner" and receive equity in my company. Investing as a lender comes with less risk for them carrying a note and possibly (if secured with a property) a deed of trust or mortgage (depending on your state). Every month just like a bank would, regardless of a profit or a loss, they receive they're agreed upon interest payments. That payment remains the same whether the company increases in value or not. As a partner with equity the risks are higher with payoff being greater if the company does well. With this option the investors get paid when I do. Interest doesn't usually apply to initial capital contributions. You could do it this way, but I would try to negotiate that you doing all the work, and them receiving 70% of the profit for a period of time is fair enough.  At most I would calculate what you need total for initial contributions and give your investor a note for half. Profits in their favor until it's paid off. 

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Josh Calcanis
  • Rental Property Investor
  • Orlando, FL
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Josh Calcanis
  • Rental Property Investor
  • Orlando, FL
Replied Nov 23 2016, 12:36

Thanks @Geo Gondzur. So really a waterfall type of setup wouldn't make sense?

Account Closed
  • Plymouth, MI
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Account Closed
  • Plymouth, MI
Replied Nov 23 2016, 12:45

Thank you all for your input! It's great to see the different ways to structure the partnership/deal. Like with investing, there are many ways to approach this topic. Please feel free to continue to share how you have structured your deals, I know I am very interested and seems like this is something others would benefit from as well.

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Geo Gondzur
  • RE Investor
  • Houston, TX
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Geo Gondzur
  • RE Investor
  • Houston, TX
Replied Nov 23 2016, 13:11

@Josh Calcanis A waterfall setup would work. You just need to program that into your company agreement. In my opinion, things can get a little complex in keeping tabs on your capital accounts when you're setup this way. Shouldn't hurt though.

Account Closed
  • Rental Property Investor
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Account Closed
  • Rental Property Investor
Replied Jun 7 2019, 04:55
Originally posted by @Account Closed:

I need some advice on structuring a partnership on buy and hold deals.

I am a new investor and have decided to partner up with a good friend of mine on starting our real estate journey. We both currently do not own any investment properties but have similar goals in real estate. We both want to acquire a portfolio of rental properties. Our target is the BRRR strategy but at the end of the day we are looking for solid assets that will cash flow.

I bring the drive, vision, and investing knowledge to the partnership while by partner works for a property management company so has experience with all tenant related aspects, is a licensed broker and has access to MLS, and has contractors he trusts (we have yet to use them for personal projects). We both bring equal capital to the partnership and do not have enough capital individually to execute a deal (currently).

We originally were going to acquire all properties in a joint LLC but decided that might get complicated in the future when either of our investment goals change. We have pivoted and decided that each partner would purchase a property individually with the other partner acting in a JV role.

We will still work as a team and help each other out with whatever needs to be done with each others properties.

My initial thoughts are to set the deal up where the partner not purchasing the property provides a sum of capital for rehab/purchase with a fixed return (10%?) and terms and also receives a percentage of the cash flow for help managing.

My question is:

How have people in a similar situation structured their JV agreements?

Are there any books/resources that I could read to learn more about structuring deals like this.

 Hey there, I was wondering what you ultimately decided to do in terms of the structure? Can you share with all of us? Thanks!

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Sean Lindbloom
  • Chicago, IL
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Sean Lindbloom
  • Chicago, IL
Replied Apr 24 2020, 10:06

@Account Closed Do you have any update on how this turned out or the structure you decided on? We are looking at a similar structure with a group of partners. 

Account Closed
  • Plymouth, MI
10
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Account Closed
  • Plymouth, MI
Replied Apr 26 2020, 07:16

Sorry all I haven't been on biggerpockets for a couple years now and lost track of this post. As an update to our business structure:

Partner and I each acquire properties in a single partner's name. We usually trade off who is "purchasing" the property. We do this instead of acquiring in an LLC to take advantage of low interest rates with Fannie backed mortgages. We generate a JV agreement that lays out the structure for that deal. Depending on who brought what money and what we decide as our exit strategy each JV might be slightly different.

we have a joint LLC that is our management company. Our management company performs all duty's related to renting and property management. We are both members in this LLC.

I understand this strategy has its fallbacks and limitations but it works for us for now. Hope that helps!