Partnership where 1 partner would live in the investment

[Brandon Allen Willis]

Hello everyone - thank you for clicking in here!

I have a friend/acquaintance that I have known all my life. We aren't super close, but we trust each other and we're both logical people with decent incomes and are considering the idea of investing in real estate together despite the risks of mixing friends with business. I'm 24 and he's 23. He just graduated from college and is living at home saving up for a down payment and I'm saving up for a wedding, but I also make enough to save for beyond how much we intend to spend for the wedding. Due to this, we're hoping to put our funds together and buy a bigger deal than either of us could manage alone.

We really would like to find a way where him and I could go 50/50 on everything and we both intend to reinvest 100% of the profits at least for the first few years while we work full time jobs for income. The complexity comes in with the "how". The fact is, he will have trouble saving up for 2 down payments within the next year, so if we invest in a property together, it would be ideal he live in the property for his sake.

I've suggested that he should pay the full rent in the form of owner contributions (or some other way to not get double taxed on his dollars) to an LLC we would own (we're intending to buy a 6+ unit property) to make up for the loss of income by him occupying the unit. This way, he can keep his 50% equity and in my mind, all is fair and the money he's paying in rent is a direct investment into his business. He doesn't love this idea because he sees it as throwing money away as if he was renting from anyone else and would rather pay a mortgage towards equity in his own place. I have no idea how he'd afford the two down payments that way as this seems to be a huge drawback to me, but regardless I've suggested that as an exercise to test our partnership, we should at LEAST figure out how we could possibly structure this deal to be fair even if he decided not to take it. Half as a test of our partnership and exercise to strengthen it, and half because I truly feel there's a solution here that works for both of us. I want to know the extent of what we're getting into and how we can properly structure this deal in such a way where we both feel like we win and nobody builds any resentment for one another. I feel like there's a solution here where we all win.

We're intending to manage the property ourselves, but will only go in on a deal if the numbers work *with* a PM company in the event that managing the property becomes overbearing. While we intend to manage the property 50/50, I'm curious how practical that could be when he's living on-site. If I never step foot onto the property myself after owning it and we manage it ourselves, is it realistic that it will be possibly for me to pick up 50% of the work to manage the property?

Curious what you all think about our situation and what you would do. Anything you can share about previous partnerships, especially if one partner lived in the investment, would be gold here. No matter what, I greatly appreciate your time. Thank you, and I look forward to meeting some of y'all in the replies. 😄

Also, just so this is covered - we will absolutely be talking with a lawyer and a tax professional before making any moves. I just feel like there's value to gain out of hearing from other investors before we go any further.

[Andrew Bang]

Don't do it.  Sounds like you two are on different pages and have different ideas.   Buy what you can afford by yourself.  From reading your post, this is a dumpster fire waiting to happen.  High chance of failure and ruined friendship, low chance of success.

[Timir Shah]

Hi Brandon,

This definitely sounds risky. Even with legal paperwork in place such as a Operating Agreement, there is a lot of risk involved in this potential partnership. 

One suggestion I have is why not find a duplex or triplex for yourself and your marriage partner and live in one unit and rent the other out?

[Nathan Gesner]

Quote from @Brandon Allen Willis:

I didn't even read your entire post. I already see cracks in the relationship and how the two of you are thinking about this. He's expecting a discount on rent and he would likely feel entitled to more control because he occupies the property.

I recommend you do not partner with him.

[John Warren]

@Brandon Allen Willis any time I speak with a newer investor who is early on in their career, these types of ideas pop up. Partnering is something I wouldn't recommend you do until you have done a few deals yourself. You can use an FHA loan or another low-down payment loan to buy a deal with a relatively small amount of capital. You can skip the lawyer/operating agreement and then you will be able to get some real-world experience to help you know what types of deals you want to do.

With you being in the Chicago area, we are loaded with great building inventory. Focus on an area near where you want to live and get to know what constitutes a good deal. You can probably find a nice 2 or 3 unit that makes sense to get you started. 

[Brandon Allen Willis]

Hi all,

First and foremost, thank you very much for your input into this situation. I'm very grateful to have educated outside opinions.

Ultimately, I'll likely trust the repeated advice above to abandon the partnership, but for sake of fully exploring this option, I'd like to provide a little more reasoning as to why I'm pursuing a partnership and at least confirm that it does not change any of the above feedback.

There's smaller reasons such as his significant other's family actually does rehabs for a living and would likely provide more of a "friends and family" rate for any potential projects and renovations. There's also the fact that he works in banking and I work in tech, covering quite a range of differing skillsets and a diverse network when combined. Third, I know we can work through problems together and have proper dialogue; we've started from opposite ends of a problem before and worked our way to somewhere in the middle. It's nice to have some confidence that we could do that when partnering on deals.

However, the biggest reason by far that I'm personally interested in pursuing the partnership is to reduce my risk. I'm aware there's risk in entering a partnership and I'm aware it should approached with the same caution as approaching a marriage. It might be relatable to say doing a partnership on your very first deal is much like getting married after your first date. I understand this and am carefully considering it. However, I am absolutely terrified of the thought of purchasing an investment property (I don't want to live in any property I purchase btw) and having to deal with sudden expenses and vacancies myself. The thought of having a vacancy or having to evict someone while also having a sudden $10,000 repair that wasn't considered for shortly after purchasing the property scares the **** out of me. 

Partnering does two major things to reduce risk in my mind: 

1. We can get a bigger property such as a 6 or 8-unit like we've been looking at. This means that when there's a vacancy or we need to evict someone, we have only 16.6% or 12.5% of our revenue reduced whereas if that happens with a 2,3,4-unit we're talking 50%, 33%, 25% which is a significant difference.

2. Whatever expenses there are are cut in half and in exchange so are my profits. I felt that for my first deal, halving my profits in exchange for halving my expenses was a trade I was willing to make.

3. There's two of us to work through literally whatever happens and two different angles we can look at everything. Granted, this could be solved by us forming more of a mastermind group where we have separate investments, but remain deeply involved in advising one another through things.

One last thing - I've switched my perspective on how we'd look at this and my potential partner and I have reached a new agreement that we both like of how this would work. I'll explain super brief as to not pretend it's more deeply thought out than it is.

Say we have a 6-unit and he lives in 1 of the units and I do not. I would be responsible for 50% of all expenses, no matter what, and be entitled to 3 units worth of income to help pay for those expenses. He would also be responsible for 50% of all expenses, no matter what, and be entitled to 2 units worth of income to help pay for those expenses. While he's living in the property, I would take all of my profits out right away and leave no money left in the business (not including money left aside every month for future expenses). We also thought that we could try and have him manage the property in order to work something out where I could pay him out of some of my profits to provide him a little more income to handle his expenses, but with the plan that if that becomes too much work or doesn't work for whatever reason, we would bring in a PM company. I understand that it would be vital that him and I work through under what conditions I would be able to enforce that he does not manage the property any more and a property management company comes in so that I wouldn't be stuck in a situation where he fails to manage the property and I'm not able to bring in a proper management company - I don't think this will happen, but it's something we will work through it we proceed.

Again, thank you all for your time. I can't express how much I appreciate it. I don't have a network of any kind and I have absolutely nobody to talk to about real estate, so it's nice to have these forums to poke your brains. Given this, is it still a hard and fast no from you all? If there is a chance at a successful partnership here, do you have any resources I should be looking into or scenarios I should learn about to understand just how badly this can go? Please throw anything you can think of my way and if you believe it is a hard and fast no, I would like you to scare the absolute **** out of me with stories.

Thank you all!

[Drew Sygit]

All partners should always PAY for what they are using and then be compensated separately for any services they provide.

This sets legal precedence in case of a court battle.

So, if he wants to occupy a unit, he should have an executed lease at market rent and pay it.

If he is also going to be the onsite manager, then the company can compensate him separately for that - also at market value.

If he's managing the onsite maintenance & tenant issues, you can manage the admin side - rent collection (no pickups, just online), collection efforts, evictions, bookkeeping for rent ledgers, late fees, etc, paying expenses, etc.

[Joe S.]

You said you are saving up for marriage. There’s your future partner right there. 

[Basit Siddiqi]

Do not do it.

You get into a partnership because there is something the other can offer that you do not currently have.

It seems like you or him do not have the experience...If you do not have the experience, tag up with someone who does.

Also the fact that someone will be treating a portion of it as personal makes things more complicated.

[Mario Morales]

This kind of sounds like "I know he has his flaws but he loves me Ma". There are hundreds of examples of people having less experience, less education, and not speak English. They do have one thing and it's determination with enough foresight to start small, understand that it is important to start small and learn the business. You can get a 2 flat, have a bad tenant and have a major sewer problem that will cost you 10k. Things always happen and you want to take this on with a partner you're not sure of with a 6-unit? Just imagine getting a 6 unit and for some reason things were missed during the inspection and 1) Electrical wiring has to be changed  2) Oh look that plaster is coming off and its all plaster  3) Turns out 2 of the tenants are leaving because they are buying homes 4) Looks like we need to replace 1/2 of the windows and appliances. 

[Brandon Allen Willis]

@Mario Morales - it sounds to me like the primary thing you're putting out there is to not go for a 6+ unit property as my first property. From what I've read, it seems that larger properties are typically less work than smaller ones which is largely what attracted me to them. Not to mention, the vacancy risk goes way down for reasons I stated above.

So let's assume I did not partner up and I still had my sights set on a larger multi-unit property (6+) - would you say that, assuming I had the down payment, this is a bad idea? Imagine I don't have a partner and these things happen - I feel as though I'm twice as screwed!

@Basit Siddiqi, @Drew Sygit, @John Warren - thank you for your input on the potential partnership. I'm not going to go so far as to say it's completely off the table, but I definitely understand and hear your warnings. Having had business partnerships fail in the past, I would advise the same to someone just starting out, but I know how to manage a partnership/biz relationship and so does he as we both have experience (successes and failures) doing it. Does knowing this STILL not sway any of you to a "maybe" or is this truly just a bad idea and too risky? I still have trouble wrapping my mind around this partnership carrying more risk than being the sole maintainer of a property. That seems wild. Real estate just doesn't seem that complicated compared to other business ventures I've done, it's just one that needs to be done a lot more carefully up front. Maybe I'm naiive? Thoughts?

Appreciate all of your time and input. I value it very highly and am constantly thinking about some of the things that have been said here.

[John Warren]

@Brandon Allen Willis not knowing you, we can only do our best as internet strangers to share our perspectives. This potential business partnership doesn't sound that appealing to me. Real estate is a marathon, and you have your whole life to invest. I would pass personally and wait till you can go it alone or have a partner with complementary skill sets, etc. 

[Mario Morales]

@Brandon Allen Willis - Yes, that is what I am saying, has it been done before by 1st timers, yes. I think the reasons you  mentioning are valid, but for someone with experience. If the building is up and running, then yes they "CAN" be less work for all the obvious reasons. Overall, I think it is really risky as for something that big, it can bring an enormous amount of emotional pain. I just finished 2 projects in Portage Park, but it was an *** kicking, and it's my 3rd building. With my experience and team in place, it got done but over budget and took 2 months longer. Had it been my 1st investment, I probably would have not made it, it was my experience and having a team that made it happen. If you do go for it, you need an experienced partner, I have 2 neighbors on the block with the 1st investment property and they are going through hell, money runs out, lack of good contractors, not knowing when a contractor takes short cuts, easily manipulated by contractors etc,..

[Brandon Allen Willis]

Quote from @Mario Morales:

@Brandon Allen Willis - Yes, that is what I am saying, has it been done before by 1st timers, yes. I think the reasons you  mentioning are valid, but for someone with experience. If the building is up and running, then yes they "CAN" be less work for all the obvious reasons. Overall, I think it is really risky as for something that big, it can bring an enormous amount of emotional pain. I just finished 2 projects in Portage Park, but it was an *** kicking, and it's my 3rd building. With my experience and team in place, it got done but over budget and took 2 months longer. Had it been my 1st investment, I probably would have not made it, it was my experience and having a team that made it happen. If you do go for it, you need an experienced partner, I have 2 neighbors on the block with the 1st investment property and they are going through hell, money runs out, lack of good contractors, not knowing when a contractor takes short cuts, easily manipulated by contractors etc,..

Thank you Mario. I appreciate hearing about your personal experiences. Sounds like if I were to go ahead and invest in a larger multi-unit I need to prioritize setting up a solid team and ensuring I have plenty of reserves before engaging. More likely will be that I target a tri/quad-plex unless I can find a larger multi-unit that is turn-key or close to and still a good deal. We'll see. I likely won't be getting a property until after my wedding next November anyways, so I do have a lot of time (fortunately and unfortunately). Thanks again for your input.

[Brandon Allen Willis]

Quote from @John Warren:

@Brandon Allen Willis not knowing you, we can only do our best as internet strangers to share our perspectives. This potential business partnership doesn't sound that appealing to me. Real estate is a marathon, and you have your whole life to invest. I would pass personally and wait till you can go it alone or have a partner with complementary skill sets, etc. 

 Thank you, John. I'll be sure to keep this in mind. Appreciate you following up.