Buy and hold partnerships, one in town...

Jeff S. · 2012-01-29T05:27:40-08:00

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.

Mark UpdegraffBusiness Member

Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 706 votes

14y

Originally posted by Bryan Hancock:

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.

Agreed. "you only make money when you buy" as they say. Without someone skilled at acquisition your profits suffer.

And as J pointed out, it could be worth more than 50% if the active member is that good.

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Rusty Thompson

Real Estate Investor · Salem, OR · Member since 2011 · 422 posts · 149 votes

14y

I'm not trying to be Smarmy.... could someone please provide me a real world example of when it would make sense to take on a 50% stake partner on a long term buy and hold. Wouldn't make more sense to pursue cheaper financing? The only time I can see this happening is if this is your only option. Which means no money & a really risky bet for the lender.
As I think this through, this is really only for very large scale deals for a new investor. Things were a small time investor cant come up with the capital any other way?
If someone can enlighten I would greatly appreciate it.

Sorry for Highjacking Jeff, I hope any answers will shed some light on the particulars

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Bryan Hancock

Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes

14y

How about if you buy a rehab and the investor does months of rehab prior to leasing for cash flow? I could see many scenarios where the value of said labor would be worth at least as much as the materials used to rehab. Not to mention finding the deal and performing all of the other tasks to get the property ready to lease.

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Rusty Thompson

Real Estate Investor · Salem, OR · Member since 2011 · 422 posts · 149 votes

14y

Brian
I'm a little confused, my original hypothesis is that money is not worth a 50% equity stake. When hard money is available @ 10-15% with the right deal. The deal would have to be incredibly good & expensive to make it work giving someone 50% of the profits & 50% of the profit. It's a incredibly good deal for the lender, as long as they don't mind the liability of being a partner.
I listened to a pod cast the outlined this scenario & you are walking on thin ice from a securities stand point. Cant remember who posted it, but it was great. They were lawyers who focused on accounting. The outlined it as getting your cake and eating it too. And they strongly advised against it.

..... maybe I should start bookmarking these things.

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Andrew Jones

Investor · Los Angeles, CA · Member since 2011 · 242 posts · 61 votes

14y

This thread has been a great read. I will have to agree that the partner on the ground should be compensated based on his ability. Lets look at an extreme example say I invest 100k on aquiring the property, rehab and holding costs. Then lets say the guy on the ground is so good that in less than a month he sells it for 200k. Shouldn't the guy on the ground make even more than 50%? Even if he got 70% that would still give me an amazing ROI.

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J ScottPro Member

Moderator

Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes

14y

Originally posted by Rusty Thompson:

I'm not trying to be Smarmy.... could someone please provide me a real world example of when it would make sense to take on a 50% stake partner on a long term buy and hold. Wouldn't make more sense to pursue cheaper financing?

First, let me throw out there that everything I've been saying has been a thought exercise -- I've never partnered on a long-term buy-and-hold and I'm not sure I ever would; I'd much prefer to borrow money at 10-12% than partner given that it's *generally* cheaper to do so for me. And most of my lenders would prefer to lend shorter-term for my flips than longer-term for buy-and-hold (that said, anyone who wants to lend short- or long-term, feel free to let me know :).

But, to answer your specific question above, if the person doing the work weren't experienced and/or didn't have access to cheap capital, a partnership could potentially generate much better returns than borrowing at high-interest rates.

For example, assume that you purchase a property with little equity (you couldn't easily resell it for a profit) but that throws off about 25% per year in cash flow (cash-on-cash return). If you're working with a partner, you're earning about 12% per year on his cash investment for your work. If you're borrowing hard money at 5 points and 15% interest, you're now in the hole 5 points and earning 10% (25% cash flow - 15% interest payments) per year on your cash investment that you borrowed. In the second scenario, consider that you're on the deed exclusively, so you have risk as well.

Which situation is better for you financially?

That said, in the same scenario, if you can borrow long-term funds at 10%, you're going to earn about 15% on the borrowed funds, which is better than having a partner.

So, cost of capital needs to be considered before determining an optimal situation.

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Bryan Hancock

Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes

14y

Originally posted by Rusty Thompson:

I'm a little confused, my original hypothesis is that money is not worth a 50% equity stake. When hard money is available @ 10-15% with the right deal.

You have your wrong point of view. The point of view is from the person placing the capital. The point of view is not for the person acquiring the property and operating the deal. That person may not have access to debt capital or may value a long-term relationship with a money source where they don't have to worry about access to debt capital.

A partnership for this person where their cost of capital is higher and the ACCESS to capital is certain may be a good arrangement. This is essentially what private equity funds do.

Another issue is that not all deals will need zero equity capital to transact. If the OP's deal finder has insufficient equity capital to transact the many deals he is finding that have great upside then the capital is likely to come at a higher price.

For the OP all that really matters at the end of the day is the risk-adjusted returns that will be generated by the partnership. If the operator he partners with provides great deals and adds significant value to the product acquired then 50% may be justified. It is hard to talk in the abstract.

For a long-term arrangement you will need to analyze the exit thoroughly in case one partner wishes to monetize and the other doesn't. A good attorney should help a lot here. Other things like who controls tenant selection and such matter too. If the money partner is truly passive too you have likely created a security and you will need to find some exemptions or get clearance from an attorney for this too.

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McKellar Newsom

Real Estate Investor · Chattanooga, TN · Member since 2009 · 191 posts · 47 votes

14y

Jeff,

We have a few holdings in Oregon and use Sterling Property Management out of Corvallis. This particular property management company has been amazing. They are one of our best property management companies.

Since you aren't too far, you might want to touch base with them to see how the rental market is doing in Corvallis. They might have some suggestions for a good realtor in the area.

Good luck. mck

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Jeff S.

OP

Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes

14y

Thank you McKellar, I've wondered about the southern areas.

Knowing about a good management company has been the missing link in my searches. Will give them a call to get a sense of how things are going down there.

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Buy and hold partnerships, one in town...

Buy and hold partnerships, one in town...

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