Partnering with an investor, Any advice?

Question

I am looking at purchasing an SFR but do not have the funds myself to afford it. I am looking to partner with a family member who is willing to provide the capital for the initial purchase. I know it is a good deal but does anyone have any advice when it comes to structuring the partnership?  What extra things will I need to prepare/complete in the transaction for this situation?

Jim Pellerin · Answer

You need a joint venture agreement. In this document, you need to specify who's doing what and who's getting what. There should be some sample real estate joint venture agreements out there. Just google for "real estate investing joint venture agreement"

I'm assuming he's providing all the money and you are providing all the services (property management, etc.).

How much equity will you each own? Will you be on title? Who get's the positive cash flow from rents? What if there is a negative cash flow due to reduced rent or vacancy?

And anything else you want to spell out.

Drew Sygit · Answer

@Brett Deas

When partnering with anyone, but especially family & friends, you want everything in writing. Otherwise, you may not be welcome at family events!

Too many investors want to partner with “handshake agreements”, which they would never do with a tenant or property management company.

Things to think about:

1) What happens if one of you is suddenly incapacitated or dies? Do the surviving partners get that investors shares or do they have to deal with relatives that may be ignorant and/or greedy?

2) What happens if one of the partners wants to terminate the business relationship and wants their investment out now?

3) What happens if one of you drinks & drives, killing someone and getting sued by the victim's family? How would the other partner(s) be protected from that?

So, why wouldn't you want to hire an attorney to create a partnership agreement and perhaps an LLC to cover as much of the above as possible?

Steven Foster Wilson · Answer

Does this partner just want a return on their money or equity? Do they want to be a part of the process or just passive investing? All of those will change how you manage the property. Because you do not have the funds will it be getting financed in your name or will they be getting the loan? It is important to sit down and communicate about all of the processes and make sure everything is clear in writing. I would also be calling around and talking to different lenders. Compare rates/terms and see what will work best for you.

David M. · Answer

@Brett Deas

Well, if you are partnering with non-spousal partners you need a legal entity, such as a LLC.  As part of generating the Operating Agreement, with qualified professional assistance of course, it would layout the profit/loss flows, responsibilities, contigencies, etc. so that its all laid out in black and white up front.  Not having all this discussed and agreed upon up front is how many partnerships end up in disaster --- although, having it does not prevent it...  Partnering with family is a double edged sword.  Sure, "blood is thicker than water" and maybe you don't even need the LLC.  Or..  maybe you two will never speak to each other again.  Your personal call...

As far as structuring this...  Many times the "50/50 split where one partner provides the cash and the other provides knowledge or sweat equity" really doesn't make sense.  We've had this discussed at lenth on bp before and that is the general consensus.

The concept is that investors make money off their capital or credit servicability.  This also means that we can lose money.  Employees/contractors, on the other hand, get paid for their work either way.  So, in your case if your friend has no money to contribute, where is his risk?  If this deal goes bad, what does he stand to lose?  It basically sounds like a you are the developer and he just owns the land.  Buy the land off him and perhaps give him a consulting for his knowledge and contacts.  Also, its not clear what are you bringing to the table?  The money?  Then perhaps structure this as a loan.  Basically, when somebody is doing a "traditional job function" its many times better to just be paid for that job. You can split the remaining equity profits (... profits are after the expenses...).  I'm not sure what is your difficulty in going alone...

So, from a business standpoint and I was your partner/investor, I don't know what/why I'd be cutting you in for an equity split if you aren't taking any of the risk.  Your family member may feel differently.  There are other investors who don't see point of view.  So, take your pick  :)

Does that help at all?

Partnering with an investor, Any advice?

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