flip partnerships VS. long term rental partnerships

13 Replies

Hello all!

My name is Brad Decater. I am new to bigger pockets and wanted to do an intro as well as ask a question to all of you experts out there! 

First off, I am very excited to be apart of this community and think it is an amazing space to learn RE investing! I am a Real Estate agent a little outside of Seattle Washington and am just starting out on my investing journey. I am a home-owner and am currently working on my first flip. I have been talking to some people who would make for a good partnership, however, I don't really know how to format a great partnership that is fair to both sides. The potential partner(s) would be providing mostly money. Although I would have some to put in as well, this is the main reason I would need them. I Don't have tons saved up and am still within my first 2 years as an agent so cant get a mortgage until I have had 2 years in the industry. 

I have a few scenarios I would love some feedback for.

1. My partner pays for the entire purchase price for a flip and rehab, and I do literally everything else. Find deal, negotiate and get into contract, close, coordinate rehab, sell myself as an agent...50%-50%  of net profit makes sense right? their money, my work. seems like a fair trade off. 

2. Partner can qualify for conventional loan and pays 20% down for a mortgage...same scenario on my side(I do everything else). Seems like at this point even though they paid the down payment, it is still significantly less than a full cash offer... Does this change the percentage that we should be sharing? considering his cash on cash return would be substantially better, but my work load is the same...any thoughts?

3. Partner pays for entire purchase price and rehab for a long term rental. I find deal, coordinate rehab and manage it. How does this partnership work? Does he get paid monthly-half of the cashflow? I really have no idea how these long term rental partnerships work. When you partner for these, who is on title? How does each partner make their money? does it change if this scenario is based on the person putting down a 20% payment as in the previous example, but for a long term rental?

I feel like you would just split the cash flow every month, then if you ever sell you pay the partner the full amount they invested, then whatever is left after that you split 50-50.

Pretty sure I am missing a lot and would love some insight on how partnerships work.

Thank you!

Brad Decater

Welcome to the right place Brad!  I have to be honest, I've been meaning to get those same questions answered for myself, so I'll be following this thread!  Just wanted to extend a warm welcome though!

Thank you Brandon Wieschhaus!

I found a blog here that was helpful for mw that i will share.

Any other feedback would be greatly appreciated!

https://www.biggerpockets.com/renewsblog/2015/12/03/structuring-partnership-rental-properties/

I'm in the same boat not being able to get traditional financing so I know the struggle! You'll have to take a pretty small cut if you're taking on effectively zero risk and asking someone to solely trust you to not lost them a substantial amount of money doing something you haven't done before. 

That said, I would first off get down to the Fixated on Real Estate meetup next week. It's in Renton and you'll meet a bunch of flippers that can tell you how to structure your terms to be attractive to the guys with the money. 

For buy and hold rentals, a 50/50 split can be pretty fair. A lot of folks will want a preferred return. So you'd give them their 5% or whatever of the cash flow before you get a single dollar and then split the rest. You'll just need to get someone who's willing to stick it out long-term as it will often take 5+ years before you can sell without being in the hole from commissions and such. 

I personally would only partner on flips and not rentals. Flips have a very clear and well defined timeline and exit strategy so that should help avoid any possible conflict whereas rentals you may want to keep a property that your partner wants to get out of and then you're stuck figuring out a way to try and make everybody happy which may not happen.

Originally posted by @Ryan Evans :

I'm in the same boat not being able to get traditional financing so I know the struggle! You'll have to take a pretty small cut if you're taking on effectively zero risk and asking someone to solely trust you to not lost them a substantial amount of money doing something you haven't done before. 

That said, I would first off get down to the Fixated on Real Estate meetup next week. It's in Renton and you'll meet a bunch of flippers that can tell you how to structure your terms to be attractive to the guys with the money. 

For buy and hold rentals, a 50/50 split can be pretty fair. A lot of folks will want a preferred return. So you'd give them their 5% or whatever of the cash flow before you get a single dollar and then split the rest. You'll just need to get someone who's willing to stick it out long-term as it will often take 5+ years before you can sell without being in the hole from commissions and such. 

Originally posted by @Ryan Evans :

I'm in the same boat not being able to get traditional financing so I know the struggle! You'll have to take a pretty small cut if you're taking on effectively zero risk and asking someone to solely trust you to not lost them a substantial amount of money doing something you haven't done before. 

That said, I would first off get down to the Fixated on Real Estate meetup next week. It's in Renton and you'll meet a bunch of flippers that can tell you how to structure your terms to be attractive to the guys with the money. 

For buy and hold rentals, a 50/50 split can be pretty fair. A lot of folks will want a preferred return. So you'd give them their 5% or whatever of the cash flow before you get a single dollar and then split the rest. You'll just need to get someone who's willing to stick it out long-term as it will often take 5+ years before you can sell without being in the hole from commissions and such. 

Thank you so much for the great info Ryan! I will definitely look into the meet up and make sure to be there. We can chat more about the options then if we get to meet!

Originally posted by @Brian Garrett :

I personally would only partner on flips and not rentals. Flips have a very clear and well defined timeline and exit strategy so that should help avoid any possible conflict whereas rentals you may want to keep a property that your partner wants to get out of and then you're stuck figuring out a way to try and make everybody happy which may not happen.

 Great point there Brian. Flips are what ill be starting with anyway so hopefully I can structure something that is mutually beneficial. For long term it seems if I cant do it myself, then i just have to make sure my partner and I have our goals aligned.

Thanks for feedback!

@Brad Decater there is virtually no difference in your scenario 1 and 2. Whether the partner puts up cash from his bank account or borrows cash to put it up, he is still on the hook for that amount of cash. His cash on cash, as you put it, is irrelevant. If he loses that money he is either out of pocket or he owes that money to someone. Both scenarios carry the same amount of risk so the reward should be the same. For scenario number 3, if you can refinance after a certain amount of time (agreed upon by both) and the lender gets all his money back then holding it as a long term rental as a 50/50 partnership from that point forward is reasonable. I have done that, where I provided the seed money and the partner did all of the work. Our goal is to keep this going and build up a portfolio of rentals that are split 50/50. 

Originally posted by @Julian Buick :

@Brad Decater there is virtually no difference in your scenario 1 and 2. Whether the partner puts up cash from his bank account or borrows cash to put it up, he is still on the hook for that amount of cash. His cash on cash, as you put it, is irrelevant. If he loses that money he is either out of pocket or he owes that money to someone. Both scenarios carry the same amount of risk so the reward should be the same. For scenario number 3, if you can refinance after a certain amount of time (agreed upon by both) and the lender gets all his money back then holding it as a long term rental as a 50/50 partnership from that point forward is reasonable. I have done that, where I provided the seed money and the partner did all of the work. Our goal is to keep this going and build up a portfolio of rentals that are split 50/50. 

 @Julian Buick, Thank you very much for your input. Your right it wouldn't really matter if it was all cash or borrowed cash and I appreciate you pointing that out...I had not thought about it like that. For a long term rental I really like the idea of refinance, pay lender, then 50/50 from then on. I will defiantly consider that when looking for a long term rental. Thank you again for responding, I really appreciate the feedback.

I would start with partnering on flips and once you have built some of your own capital you can go into acquiring rentals. As @Brian Garrett said you could potentially run into issues with a long term rental with exit strategies and goals changing over time.

Originally posted by @Dustin Posey :

I would start with partnering on flips and once you have built some of your own capital you can go into acquiring rentals. As @Brian Garrett said you could potentially run into issues with a long term rental with exit strategies and goals changing over time.

 Thank you @dustin posey! that is actually my exact plan. I've had a good first year in my job as a real estate agent and working on my first flip now(should list in about 3 weeks). In 2018 I want to save a good amount of capital with an outstanding year as an agent, as well as doing 4-6 flips. Then my 2 years will be up and should be able to qualify for a decent size mortgage. That being said, If a long term rental opportunity comes my way I can't pass up I may end up doing a partnership this coming year... What would be really ideal is to get seller financing though and do it on my own. Then be able to refinance out of it a year later to get traditional mortgage once I qualify again. Thanks again for your post. appreciate any advice. I am just getting started and realize I have lots to learn! 

For long term partnerships. Without you putting in any capital, you should ask for 25 to 50% of the capital gains of the project upon sale. As for cash flow you should negotiate a preferred return and anything above that rate of return (cash on cash), you will get 25 to 50% of the cash flow. Cheers.

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