Partnership Question - Please Help!
Hi everyone! New investor here, I am seeking for some help to make sure I am not missing something in the partnership I am entering into with my Mentor. My friend who I have know for 5 years is 65 has a successful rental portfolio and is excited to pass it forward to help me get stated and is just re-energized with how enthusiastic I am about real estate. (Caveat - I have been a die hard BP fan for 6 years and bought our first home from the 90 day challenge in 2017). Jim an I have decided to go into a partnership because it allows him to have an exit strategy and become 100% passive, while allowing me to get a jumpstart at 35 years old utilizing his capital. He owns 6 paid for rental homes and I am going to buy one of single family homes (below market value!) and then he is using a 1031 exchange to buy another single family rental, while saving (Deferring) a lot of money in taxes. I am purchasing his home for 500k and he is buying a rental that I found for 500k. We have an 50-50 partnership LLC that we are going to quit claim the properties into so we have 1 million in properties together; I will have a loan for 375k. Since the 2nd property won't have a loan and is currently rented, we are going to have $6,200 in rental income and a $2,900 debt payment on my loan, putting cashflow into the partnership until our Emergency fund is met and then splitting the cashflow 50/50 while I handle the property management. The idea is that if we do this with his other 5 properties (adding 10 more properties to the partnership) and we hold everything for 10-15+ years, I can either buy out his half or we can just sell it all and split the profits. I would then pay off my loans from the homes I bought from him and he would have made a lot more money, regardless of the gains at that time. This sounds like a great idea on paper and it is a way for me to get so much more capital than I can do on my own....But what the hell am I missing or is this just a unicorn type of situation??? I appreciate any comments to help me get going or avoid a problematic situation...Thanks BP!!!
Quote from @Brett Dickerson:
Welcome to the BiggerPockets forums!
If this is correct, it's a unicorn deal.
Jim is investing $500,000. You are investing $125,000. This means the total equity Jim is investing 4x as much money (plus whatever he loses by giving you the property below market price), then he's splitting the profit with you 50/50? If this were structured fairly, Jim would get 80% of the return and you would get 20%.
Jim is either very generous, very bad at math, or running a scam. As long as you have a good attorney going through this with a fine-tooth comb to prevent the scam scenario, I would lock it in.
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@Brett Dickerson why would someone do this?
They can hire a PMC and wouldn't need you.
Oh wait, YOU are the one getting the mortgages in your name, giving you all the exposure!
Something doesn't seem right, so you definitely want to hire an experienced real estate attorney, NOT recommended by Jim, to go over this setup.
FYI: if Jim is 65 and only has 6 rentals, he's really not a big deal.
Quote from @Nathan Gesner:Nathan, thank you very much for the reply…Im very cautious about the scam and Jim is a and has been very generous to my family over the last 5 years, plus he’s a CFO so I hope his math isn’t bad! We were talking about ways to even out the equation, because we want to keep it simple at 50/50, because I am also a general contractor and we plan to develop some projects along the way. so we have a meeting with a RE attourney next week and I will address this. I will keep you posted on how we structure it and thank you so much for your input!
Quote from @Brett Dickerson:
Welcome to the BiggerPockets forums!
If this is correct, it's a unicorn deal.
Jim is investing $500,000. You are investing $125,000. This means the total equity Jim is investing 4x as much money (plus whatever he loses by giving you the property below market price), then he's splitting the profit with you 50/50? If this were structured fairly, Jim would get 80% of the return and you would get 20%.
Jim is either very generous, very bad at math, or running a scam. As long as you have a good attorney going through this with a fine-tooth comb to prevent the scam scenario, I would lock it in.
Quote from @Drew Sygit:Thanks for the input, I will address this with our Re attourney next week as we’re drawing up documents. Thanks for your input!
@Brett Dickerson why would someone do this?
They can hire a PMC and wouldn't need you.
Oh wait, YOU are the one getting the mortgages in your name, giving you all the exposure!
Something doesn't seem right, so you definitely want to hire an experienced real estate attorney, NOT recommended by Jim, to go over this setup.
FYI: if Jim is 65 and only has 6 rentals, he's really not a big deal.