Buy and hold partnerships, one in town...
Most Popular Reply
Personally, in a long-term partnership, I value the money at 50% of the deal. So, if you're providing all the financing and doing none of the work, I'd give you 50% ownership (if I were the partner doing 100% of the work).
34 Replies
Personally, in a long-term partnership, I value the money at 50% of the deal. So, if you're providing all the financing and doing none of the work, I'd give you 50% ownership (if I were the partner doing 100% of the work).
Thanks Jason. Seems like it would depend on how much work the in towner was doing. How about I put up the down, both sign for a loan and have it property managed, say in a 4 plex. When sold down comes back to me and rest is split in say 3-5 yrs or more if agreed.
Should have asked: J, what would you be envisioning as all the work? That is what I am trying to determine.
I want to approach him with an offer. Does "all the work" include fix-up and management? Were you thinking buyer to purchase then assign half? Assign half down payment? Many ways to structure. Has to be a win/win. If I was younger and energetic and in a good area to invest I'd think of this as an opportunity. Could consider larger units too.
I was thinking that you (or whoever the investor was) put up all the cash. I (or whoever the partner was) would do the following:
- Find the investment
- Due diligence prior to purchase
- Submit offer/negotiate
- Close (with your funds)
- Manage the rehab
- Find the tenant
- Manage the propertyBasically, the partner who is not putting up the cash is getting 50% equity in the deal for doing all the work.
If there is a PM company hired to do all the management, that cost should (somehow) come out of the partner's profit. Though the partner would still be responsible for managing the PM.
- Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes14y
Originally posted by Jeff Sielicky:
Being in a low yield area and confined to a daily job (low yield requires job) brings desire for out of town property. As best as I can gather buy and hold partnerships are problematic.As an out of state investor wanting someone with skin in the game to care about the property, some kind of partnership comes to mind.
Know a young guy, who is the son of a friend, who is buying property in a southern area that is conducive to cash flow.
Understanding how one person that carries all the burden could feel like they are getting the short end of the deal, I wonder what kind of arrangement would be fair where one lives in the area, finds property and keeps track of it, while the other investor is out of town too busy to be involved.
I have more capital and credit than does my young friend so my contribution would lean more towards the capital side but that makes the partnership lopsided. Any suggestions appreciated.
There are two distinct types of financing and both require your and your money partner's ROI requirements and risk thresholds.
One: An equity partnership is where operating partner and money partner have an ownership stake (title) in the property. This means it is shared loss/gain proposition and you assume potential liability for any losses including legal issues that may arise.
Essentially, your betting that your operating partner has the skill and experience to find, rehab, and manage the property. The risks you assume should provide you a premium over and above a safer investment.
There are also tax advantages that may come with an equity partnership, so you should
Two: A debt financing arrangement (a.k.a. Deed of trust investment) is where your the lender holding a first position deed of trust against property. Simply put, your not an owner. In exchange, you receive a fixed rate of return in the form of a mortgage payment. The operations and management partner will actually be on title and assume any risks associated with the property. You will receive a monthly return regardless of the property's performance.
The risk here is non-performance by the property owner, but you can have the title company or closing attorney hold a quit claim or warranty to be recorded upon default.
When buying and holding, I prefer to have money partners to use a debt financing arrangement if they want nothing to do with the property. It offers a similar ROI with respect to the equity partnership without the added risk. This is also a better choice if the duration of the investment needs to be a shorter timeframe.
Good Luck!
I certainly like the idea of having a property rehabbed and having non cash partner contribute that. Wondering who pays labor and materials for the rehab and how that cost is divided.
Management then would seem to need to be an infinite time frame. The longer the non cash partner contributes his time managing, the bigger his share of the contribution. We are talking about management as a contribution, I am gathering.
So, when we say "50% equity" are we saying cash partner pays cash for the property and half equity is paid to non cash partner for his duties, or are we saying equity up to a loan plus profits over investment, or 1/2 profit up and above purchase price and rehab costs only?
Originally posted by Jeff Sielicky:
So, when we say "50% equity" are we saying cash partner pays cash for the property and half equity is paid to non cash partner for his duties, or are we saying equity up to a loan plus profits over investment, or 1/2 profit up and above purchase price and rehab costs only?When I say 50% equity, I mean that at the end of the day, they earn exactly as much as you do in terms of profits/dividends/salary. Basically, all the work they do (100% of the work) provides them the exact same amount of ownership as you would get from contributing 100% of the cash.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes14y
I would structure the deal where you get:
1. Your investment back FIRST
2. A preferred return on your dollars invested SECOND (before the labor component gets one red cent)
3. Some split thereafterNumber 3 really would vary based on value added by the labor component. Number 2 keeps the labor component from letting the dough sit around idly. Number 1 is a must.
Originally posted by Jeff Sielicky:
So, if I put 70k out to purchase and spend 30 on materials and labor I am in 100k. The property is rehabbed and eventually resold for 200k. I get 100k back? Or do I get 1/2 profit plus my investment back?You first get your investment back (your $100K in this example), and then you split the $100K profit ($50K each). Plus, if there were cash flow during the holding period, that would be split as well.
- Rehabber · Member since 2011 · 66 posts · 9 votes14y
Jeff I wouldn't give anyone 50% considering you are putting up the money and taking all the risk. Think about how money management works, the most sophisticated hedge fund would only take 20% and a few points for operating expenses.
I haven't done buy and hold but I'm sure you could be pull this off with a good realtor and someone to watch over your properties from time to time. Don't be a sucker. I see so many wanna be investors with no money thinking they should get 50% around here in Seattle. I invest in Florida and I work with a realtor and a contractor, the profit goes to me and it works fine everyone is happy.
Now I understand the value of having someone you can trust on the ground and I'm not saying this person shouldn't get a cut but perhaps you should work out a deal where your partner gets a scaled % that increases over time as you do a few deals and see how the work and effort split plays out. I'm sure you have worked hard to have the cash you have, the ball is in your court IMO so take it slow and protect yourself. - Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes14y
Jeff -
I agree that you can do this yourself with the aid of a reliable and competent property manager and investor savvy agent in your city of choice, Atlanta, Memphis, KC, Indianapolis, Cincinnati, etc. The PM, who is also an agent of course, locates/inspects properties for you that meet your criteria. This is performing agency service for you, and they'll earn realty commissions, so this is their initial incentive and compensation.
They will also want to manage the property for you on an ongoing basis, so this provides a strong incentive for them to oversee the rehab of that property, in a manner that is satisfactory to you, using either their in-house crew or another contractor. Initially, you will want to get multiple estimates. The PM also has a good feel typically for the level of rehab that is appropriate to bring the property to an optimal state of rental readiness. You MUST use a PM with some scale, with at least 100 units or more under management. You are at more risk, as a long distance owner, to the small-time or part-time PM, who gets worn out and just drops the whole thing to take a day job or focus on their real estate agent work.
Once the PM has the property under mgmt, there are a host of things you can do to help ensure that they're not fleecing you on maint fees, and are placing good tenants. Most have to do with continual communication, transparency, pre-approval thresholds, and accountability standards.
One note, as a long distance investor, you will almost certainly not be able to get local bank financing. If you still have the ability to finance conventionally (less than 10 loans), this would be a possibility. If it's commercial (5+ units), you will likely not get financing, period. Even national commercial lenders want to see the owner living within 100 miles of the property, typically. This is an area where having a local partner who is on deed (or a member of the LLC) can be helpful/vital in opening financing doors, if that is something you want. You may be perfectly content with earning 12-20% unleveraged.
- 14yMark UpdegraffBusiness MemberReal Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 706 votes
Originally posted by Mike B:
Jeff I wouldn't give anyone 50% considering you are putting up the money and taking all the riskI wouldn't do all the work without 50%. The skills involved in what J outlined are not trivial. I'm damn good at what I do, and my time is as valuable as your money. Just sayin' there are two sides...
Updegraff Group Realty4.746 Reviews Basic hurdles that might trigger the need for a partner in your situation is:
A. Finding a Deal and making an educated purchase.
B. Rehabbing the property and make it rent ready.
C. Once the property is ready, find a tenant and manage the property on a long term basis.Obstacle A and C can easily solved by finding a good Realtor who is local to the area and build a relation ship with him/her. Item B, finding a good contractor is critical to this business. Because B can help you make a decision on A, they can give you accurate numbers on the the rehab work. And finding the tenant and getting them to sign a lease etc,. is easy because most realtors can do that for you, they charge about 50% of first month's rent which I believe is well worth it.
I live in the dallas area and I typically don't even look at the properties (for most cases) , I have a good contractor who will look at the property and run the numbers for me on the repairs. I make the offer and close on the property and then hand it over to my contractor and don't even talk to him for a month of so until the property is ready. I then hand it over to my realtor to list it and find a tenant. Once you establish a good relationship with these people, you rarely have to be local to own properties. I would think if you find a partner and have him do all of this, it would either be the same or more expensive depending on how you agree to the partnership. You also you give up control of property that is essentially being purchased with your money and also certain level of uninformed risk.
My recommendation is look for some REI clubs in the area and make sure you get involved yourself to gather some knowledge on local wholesalers, contractors and realtors etc,. Once you speak with them and do enough research, you may have to make a few trips to establish a working relationship with them. Once you do that, it's fairly easy for at that point. As with everything else, it's easier said than done please do your due diligence before you enter a partnership with anyone, especially into the business you are investing.
Scott, thanks for your reply. I have studied your operation from here on BP and see you know what you are doing. You may be right that just doing the financing side is the way to go, at least while I am too busy to be involved.
J, the part that I am struggling with is taking 2 transactions and melding them into one. The issue is if, for example, the 200k value continues on as a rental and the investor has 150 in (100 original investment and 50 profit) then the split is giving the investor a possibly small yield. If the return is high enough for the investor then the additional return to the rehabber for management may work.
Would it be simpler to do the rehab deal with the investor financing and getting regular financing rates (from rehabber) and once the rehab is done then the investor buys half, giving the rehabber 1/2 of his profit, then continue on as even partners with you managing for say 10, or 8 % or whatever is customary for 3-5 yrs. Once rented you say goodbye to new carpet and paint. A resale in 5 yrs or so would entail a complete repaint and carpet but would probably still be modernized from the recent rehab.
You would have to want to get into the rental business (and management) and could partner up with investors who do the financing.
Another avenue for you J is turnkey. If everything was transparent it could be a beautiful thing.
Bryan, thanks for your reply. I hear people say teamwork is where it is at. I am open to that in a way but being a lone wolf has worked for me in the past. Will keep muddling along and maybe something will happen. I do like to see everything quantified.
Mike B, agree in part with what you are saying if you don't have any connections it is hard to get started. Unfortunately I am looking for cash flow which automatically puts me in a riskier situation. Already have the appreciation play covered. Cash flow is more labor intensive thus my desire for skin in the game from someone truly experienced and dependable. Once I retire (1.5 yrs) I can be more active but could use cash flow now and I am more bankable now with a job.
David, I imagine I could do this myself but starting at ground zero requires lots of research. I have spent considerable time looking at property (on vacation) but never have enough time to do the proper research to get an operation set up. To be honest, at the end of my workday I am pretty worn down and weekends are already busy. It is possible to do it alone but just not doable with my current obligations.
Mark, your (any rehabber for that matter) talent certainly isn't underestimated in my book. The thing is there is a market value and sometimes the market rewards big and sometimes it rewards small. Cash is worth what cash is worth. Saying they are always equal could be true on certain deals but also might be far off. Each deal deserves close analysis to weigh the rewards for each partner.
Pete, very nice post. You have a great operation as do the others that have responded here.
You are relatively close to your investments and have developed a great relationship with your contractor. Checking out the suggested areas would require long plane rides. One full days drive could get me to Sacramento, CA
Thanks everyone. Will be at the summit. Hopefully can continue on from there.
Jeff
- Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes14y
Jeff -- if time is very tight for you, I don't know how you can manage the risk of ANY sort of long distance investing, whether it's straight trust deed, equity sharing, or developing a comprehensive team. Conceivably you could use a reputable turnkey (yes, we're all sick of this term) company, but you'll pay their fat markup (probably 20-30%) and won't get yields above 8-9%.
I will say that once your team is in place, the incremental effort on each new deal is dramatically minimized, as would be expected. I'd think there are lots of established folks on BP willing to introduce you and link you in to their providers for something like this.
Thanks David. My experience has always been the more involved I am in a project the better things go. When I have workers working if I am there working with them everything goes great. When I am away, not so much.
Am open to suggestions. My property management consists of a tenant emailing me with a problem and asking if they can contact my contractor handyman. I say sure and they cc me. My handyman diagnoses the situation and I say go for it. He emails me a bill. Since he knows my places inside out everything is a breeze. This is different than my involvement in past projects. I like the convenience but it is not cheap. My contractor is highly qualified and so any situation is fair game, but he isn't cheap either.
I guess what I am saying is convenience can cost. Once everyone gets a slice is there any left? If there is I am interested.
Originally posted by Mark Updegraff:
Originally posted by Mike B:
Jeff I wouldn't give anyone 50% considering you are putting up the money and taking all the riskI wouldn't do all the work without 50%. The skills involved in what J outlined are not trivial. I'm damn good at what I do, and my time is as valuable as your money. Just sayin' there are two sides...
To go one step further...I might want more than 50% if the types of deals we were doing would likely return more than 30% (like short-term rentals or flips).
A lot of flip deals people are doing these days give 10-15k in profit. That could be fairly equal to what financing charges would be on a 100-150k type of deal. All in all in that price range it looks even.
J, the question is whether being a partner in a buy and hold deal would be beneficial to you, and if so what would it take to make it worthwhile. If, as Scott suggests doing the financing and not partnership is the way to go, let me know. Looking for opinions here.
- Real Estate Investor · Salem, OR · Member since 2011 · 422 posts · 149 votes14y
I hate to be the "naysayer" since I just browsed through this topic. But does a 50% stake in profits plus equity really make sense on the side of the borrower, for a long term buy & hold. How horrible is his/her credit that they are paying such a large chunk of their profits?
If the deal is there, they can get hard money @ 10-15% plus points on the back end? Depending on the cost of the property & what is cash flowing. The "grounds on man" could end up paying a 50% interest rate & 100points.
When I very first started looking for private financing, I thought this way. Finding people that would loan me money & I would do all the work & get a small piece of the pie. As I started looking more I realized how horrible of a deal it was for me.... I also read a really fantastic article about it (i wish I could remember were) that really opened my eyes. I will try to find it.
My question to Scott, is why look so far away. I don't know what kind of numbers you are looking for, but there are properties closer to home that cash flow just fine :-)
Rusty,
It isn't Scott looking far away it is me, from Portland. If you have ideas about deals close to my area let me know. You have my email etc.
Also, J is quite capable of getting financing so for him there needs to be something in it for him, or he is just helping w/ advice.
- Real Estate Investor · Salem, OR · Member since 2011 · 422 posts · 149 votes14y
Hmmm... learned something new. Can do.
- Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes14y
Whether or not 50% equity makes sense depends on a number of things. If the deal procurer is skilled enough and adds upside it may be worth 50% of the equity.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.