I'm working on a partner deal and we want to buy several properties. They will fund the 20% down on all of them and I won't bring any cash to the table. We are wanting buy & holds while I manage them as short term rentals (student housing). So there's a lot of work from me because of high turn-around, I've done this before, I have a couple other properties where I do it. They also have terrible credit so this is impossible without me (they got a windfall of money) But I'm also not bringing in any cash. The partner will be completely hands off.
How should we split the equity in the homes and then also the net income? How should repairs be split? Obviously the answer is it's whatever i'm looking to get out of this/comfortable sacrificing my time for. But I'm also trying to be fair.
Talk to a lawyer
A lawyer won't tell you what terms you should agree with the other party. Talk to your partners first and then talk to a lawyer to make the partnership agreement with the terms you both agree to. There are so many ways this can be done and it completely depends on the 2 parties involved.
For example: 70/30 split where the money member gets 70% and the managing member gets 30% for both equity and cash flow. The managing member also get a % to manage the property (this is in case managing member would not want to manage it anymore and this can vary). Repairs should come from the rental income and then split whatever is left over 70/30. In case rental income is not enough to cover the expenses, both members will put in the money based on the split (in this case 70/30).
All of the above can be modified to suit your individual needs ( say 70/30 split on equity but only 80/20 on rents etc).
First you need to be paid as a property manger separate from any other part of the transaction. 10-12% would be reasonable. That is what any other property manager would earn doing that job. If they are coming up with 20% only they are not coming in real strong. This is because you will be using your credit and technically you are bringing 80% of the funds, though of course their 20% is critical. I would take no less than 50/50 for this particular deal.
This isn't a very common question, one brings all the money and takes all the financial risk, butbisbpassive, the other does the work. I suggest you ask the proposed partner what percentage they want and then negotiate from there.
Don't forget your taking on the most risk by guaranteeing the loan since you have better credit they'll come after you first! Bank dependent they may want your partner to sign as well which with no/bad credit may kill the deal as the bank will look at it as high risk. Talk to banks and be honest about the situation and it will get you a long way, even if they don't loan, they'll know the next deal you bring will be honest. Banks want/need to lend money so being honest they may be able to get creative as they want your business!
I have done a similar deal and it's 50/50. I'm the financial backer and I'm active in dealing with mang. of re-hab as well. Most may say I'm doing too much, but it's my money. ( No one works harder for your money than you!). My partner brings plenty of weight as well and will bring 50% cash once he is in position ( he's building a house) and this was a year of getting to know each other before we made our first deal. Again it falls back on the person and you guys have to be up front about everything and have the same goals in mind. From my end, we wanted volume with flips and we both know the long term goal was to take the cash and put into buy & hold assets to build a sustainable model of passive income. We are on flip #2 and doing the same thing. Once his house it done, we plan to transition our focus to buy & hold assets and take that path.
We've both made mistakes and we both brought bad contractors to the deal, we dealt with it and learned and move on. Can't be a blame game otherwise it won't work. Put pride to the side and anything can happen.
We had many beers and conversations before and during our first flip to make sure we were both on the same page with the same goals.
I would be setting up a straight 50/50 partnership. Money is absolutely worth a 50% cut.
It seems like a general consensus is going 50/50. What about their initial investment? Should they own 100% of the 20% they put down on the house and then we start splitting after that? Or should that be part of the 50% equity split?
Also I'm not sure a property manager would only do 10% for this kind of job. It's upwards of 6 doors per house on month-to-month leases. Lots of turnaround.
Also regarding lawyers. Yep, we will 110% get a lawyer involved. That was within the first talk we had with each other. We've been friends for about a decade now but we are keeping our hearts out of the deal. Also will be forming an LLC.
Thanks all for all the input! Looking forward to hearing more.
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