How to structure a partnership

Question

Im looking to start a partnership with a friend. I understand thats not the best idea considering there could always be fall out, but its something we've talked about for a while and understand the risk.

As it stands, my potential future partner has most of the money and no time, and I have the knowledge and drive. That being the case, what should the terms be? How should we divide the partnership?

Charles Carillo · Answer

@Andre Delagarza

I am not sure what type of properties or strategy you are focusing on; but if you are flipping properties, and one partner has most of the money; instead of partnering, maybe you purchase the property 100% in your name/LLC, and the other party comes in as a lender. It is much cleaner this way. It also clearly states the roles. You are doing everything, and they are doing nothing (other than lending). If it doesn't work out, you finish the project, sell it, and part ways. After the property sells, you have no other obligations. If you follow this scenario example, you do not need a joint LLC, partnership agreement, etc.

One of the main problems with partnerships is that one party usually does most of the work, and roles are not clearly defined.

Alecia Loveless · Answer

@Andre Delagarza Make sure to get an attorney drafted partnership agreement that spells out your exit strategy(ies).

This would have saved me tens of thousands of dollars in attorneys fees and a court case in my first REI attempt where my partners were scumbags and were embezzling off all the cash flow for their personal gain.

Could have saved some headaches in a second partnership that ended easier fortunately but is why I’m very Leary of partnering and prefer equity investments now.

Mitch Messer · Answer

Hey @Andre Delagarza, I absolutely get that doing real estate deals with friends can be so much more satisfying that going it alone.

It seems so simple. You and your friend will work together and split everything 50/50.

Here's the reality: Not only do many partnerships fail, but rarely is that the best structure for these deals.

If your friend has (most of) the money and you have the knowledge and drive, why not simply make him a private lender on your deals? You purchase the deal and he gets a 1st-position lien on the property. He gets interest payments while you do whatever you were going to do to generate cash flow.

That said, if you insist on a partnership, just know that a solid, well-conceived partnership operating agreement will require a significant investment of time and attorney fees.

This operating agreement should cover all the non-obvious stuff that usually never gets discussed until it's too late. What happens if one of you dies? What if one of you is just incapacitated for an extended period? What if one of you decides to exit the partnership? If you're 50/50 partners, how do deadlocks get broken? And so on, and so on...

Lastly, whatever you do, please do not yank some crappy basic legal template off the Web and think you'll be covered, because you definitely won't be!

How to structure a partnership

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