Risky partnership or good way to get in the door?

Question

Hi have been wanting to get into my first investment for a while. I am a property manager and can operate the propert myself. But i have limited capital. Someone recently approached me about a partnership. The target is a rent ready single family in Detroit for a max of $50,000.He has a few other investment properties and has the experience I lack when it comes to analyzing the numbers and knowing how to to recognize a good deal. The issue is that he claims to not be able to get a mortgage in his name due to "having too many properties in his name". We would split the money down and responsibilities of the asset. Is this a risky scenario for me to be the only one on the mortgage? Would an operating agreement help mitigate the risks? My understanding is the operating agreements only help for entity's such as llc etc.

Drew Sygit · Answer

@Shlomo Rozen I've seen this type of "partnership" work, but most often do an ugly meltdown.

Nobody wants to spend the time & effort to properly establish a formal partnership, with an LLC, Operating Agreement, etc.

So, when negative cashflow requires the partners to inject their own capital - there's finger-pointing and a meltdown.

Proceed with MAX caution...

Bryce Jamison · Answer

Dave Ramsey says the only ship that won't sail is a partnership.

If I were you I'd save up the money myself for my first deal. Maybe it's not this house, but it could be a house hack. If you have to have this particular house you could look into DSCR loans.

I'm surprised you struggle with running numbers as a property manager. How does your company determine what to rent homes for? If you don't have any deal calculators or rent estimators, the ones on this site are good. You can also use Zillow to see what people are trying to rent their homes for.

Shlomo Rozen · Answer

He is a cousin through marriage. I don't know much about the investments he already has but he has a partner on many of those. Personally he is a great guy but that doesn't mean much...

Chris Seveney · Answer

If it is an investment property you can get a DSCR loan which the LLC would be on the mortgage. I am not buying that response.

How do you know this person? Have you done a background check on this person?

Matthew Crivelli · Answer

@Shlomo Rozen

Have you ever heard the term "straw borrower"? I would really look into this person as he may not be giving you the whole story. How well do you know them? Many times, people who are looking for these types of partnerships have background / credit issues and they need someone else to take the mortgage out for them. Just understand, if things go sideways and YOU signed / gave a personal guarantee. YOU are on the hook, your credit and background is on the line. I would proceed with caution until a proper vetting has been preformed and have an attorney look over any partner agreements prior to you signing.

Evan Polaski · Answer

@Shlomo RozenI would say this is a less conventional way to do it, but there have been members on these forums that have noted doing such a thing.  I forget who, but it was someone talking about he, his spouse, his business partner, and his business partner's spouse all maxed out the number of personal mortgages they could each hold to build their portfolio together.  While I don't know about the contracts behind the scenes, this arrangement allowed this couple to get 40 properties collectively.

Now, there are risks.  Primarily for you, if you don't know the numbers, but are taking on the credit risk of holding the mortgage, and things don't work out, it is your issue and investor could walk away.

The upside for you: if the house is titled in your name it does allow you to exert more control over the deal.  Not to say this is the right thing to do, but if investor is going to put money into a house that he doesn't have legal title to, that is his issue.

Generally, there are pros and cons to any partnership.  There are pros to forming the LLC and cons, there are pros to holding personally and cons. It is about talking with an attorney to explain exactly how you want this to work and let them help you determine the best structure, based on your goals and the situation as it stands.

Caleb Brown · Answer

If you guys are going to partner I would establish a LLC, operating agreement and the roles each will have. That LLC will have the properties in their names. You can do DSCR loans and hard money lends to purchase property. Make sure to get down to the gritty and verify he is legit. Also make sure you guys are compatible but this can be a great way to get you going.

Risky partnership or good way to get in the door?

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