Hey BP community, I was wondering if I could get some feedback on examples of how other people have structured their partnership with another investor who is solely a financial partner (silent partner)? What are your profit splits (I.E. 70%/30%, 60%/40% etc)?
I own a few rentals and have flipped a few houses on my own. Recently I was approached by someone (who I know well) about investing with me, and he wants us to set up a separate LLC to do mainly buy and hold rentals as well as do some flips.
He wants to provide 100% of the funding, but essentially be a silent partner, and do none of the work (he has another business that he works at full time). This means that I would be finding the deals, managing the rehab (we will be hiring the work out), accounting, as well as do all aspects of property management, etc.
I was hoping to get a few examples of what others have done in this type of "silent investor" situation when it comes to determining the percentage splits of the profits? I know there is no single correct way of going about this, but I was curious how others have structured it. What do you think a fair % split would be in this case?
I will also note that he (the silent partner) will own 100% of the properties that we buy and hold for rentals (he will be paying for them with cash, so no mortgages). We would only be splitting up any profits that are made (total rents collected - total costs). This leads me to my last question which is this: is it common to wait until the end of each calendar year to split up the profits (where I would actually receive a check for my portion of the profits), or do other partnerships do this quarterly?
Thank you all SO much for your feedback. It is truly appreciated !!
If he is going to own the properties100% and he puts 100% of the money in, you might want have to have him create an LLC for himself and you be a Joint Venture partner. There are technical reasons for ownership, tax and estate planning that he may want to consider this approach. Your role would & profit interest would be outlined in the Joint Venture paperwork.
I actually offer two scenarios to my Joint Venture partners. They are the Capital Investor, I am the Managing Investor. They provide the funds, I provide the properties. They fund the LLC with $50K and I locate a property using Subject To, Lease Options, Wraps and Land Contracts. No new bank lending is involved. These are found "off market" and usually come with substantial equity to us because of the way I buy.
One difference from what you are attempting to do, is that I sell the properties using Lease Options and get a substantial Option deposit. I then cash flow the properties for $500 to $600 per month above cost. The new tenant buyer takes care of all maintenance and repairs.
So the two Options that the Joint Venture partner can choose from:
1) They can choose 100% ownership, get the full Option deposit from the new tenant buyer, get the $500 to $600 a month cash flow, get all of the built in equity, get all of the appreciation, get all of the tax write offs, get all of the principal pay down and get all of the back end equity when the tenant buyer cashes out. I get to keep the original money put into the LLC as my fee and I am out of the deal.
2) They can choose 50% ownership, get half of the Option deposit from the new tenant buyer, get half of the $500 to $600 a month cash flow, get half of the built in equity, get half of the appreciation, get half of the tax write offs, get half of the principal pay down and get half of the back end equity when the tenant buyer cashes out. Any unused funds of the original money put into the LLC reverts back to the Capital Investor and I am 50% of the deal.
It's just a matter of what meets the goals of the two of you. Some of my Joint Ventures have active investors and some are passive investors.
Typically my investors prefer to be paid quarterly.
You can see how the numbers work out at:
Thanks so much Mike. I really appreciate your input and all these details !
Hey, I wanted to jump in on this with a slightly different scenario.
A friend and I are planning to invest together. He will bring the cash, and good W2 job and I will bring everything else (50/50 split for cash flow and ownership). However, we want to do a BRRRR style so we will be needing to refinance.
Any thoughts or suggestions on how this should be structured?
Thanks for your time and advice!
I was wondering what you were planning on doing in that partnership when it comes to who owns what percentage of the equity in the house ?
For example, let’s use simple numbers and say you guys buy a 100k house, your partner puts down the 20k for the 20% downpayment, and then you rent out the house.
Will he always retain that 20k downpayment portion of equity in the house (so for example, let’s just say you sell it down the road after paying off principal for multiple years for the exact same 100k price that you guys purchased it at: does he first collect his initial 20k downpayment, then you both would split whatever equity is left )? I was considering doing something similar so I was wondering what your thoughts are on that? Thanks man
@Zach Wittmann Great topic. What you are appearing to ask is a mini syndication. Mini in the sense you have one investor in lieu of 5, 10, or more. That being said, your comment "I will also note that he (the silent partner) will own 100% of the properties that we buy" seems contradictory. 100% and we don't usually go together. Typically, when there is a LLC or JV, there is a split of profits and revenue based upon who does what (bring money vs do the work). When we look at those percentages, we base it upon expected rate of return, level of risk, value of work done, are fees received, etc). In essence, you both own it, but how much each owns the two of you need to agree.
@Scott Krone , that's a great point. I think what I was trying to say was that my partner would be the one to take the financing out in his name and put the cash in for the downpayment and repairs. We would be 50/50 splitting the monthly cash flow (profits), as well as splitting the equity that gets built up from paying down the principal over time (other than the initial amount that he put in for the downpayment and repairs. Upon selling the property down the road, he would first recoup 100% of that initial amount, then we split the remaining equity at time of sale)..... I know that sounds a bit convoluted, but does that make sense? I want to make sure I'm not missing anything or making a mistake in the structure of the partnership.
One other question I had is this: if he is taking the mortgage out in his personal name, would we be able to quit claim the deed over to our LLC after he takes possession of the property?
Thanks so much for your input!
@Zach Wittmann It makes sense, but you can get the loan in the LLC verses his name. Every loan we have done has been in the LLC - he may have to personally guarantee it, but that is another matter.
That makes sense. Great tip, thanks very much !
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