Structuring a Partnership

8 Replies

I currently have a friend who is trying to help me get started in real-estate-investing he currently owns two duplexes he lives in half of one and rents the other one out. He is ready for another deal and wants me to manage the property for him my first concern is the lack of experience I have with real estate in general and the second Is how to structure the deal to provide both of us protection he has money to front. So what would the bigger pockets community recommend for us as far as structure and for me specifically to do to make sure we are successful. We are looking for multifamily buildings and I have a couple I think have potential I'm also trying to determine the easiest way to pick between buildings I have not looked at either property yet but one is 174,900 list on the mls with 6 units I have not been inside of the building but I believe the rent in the area is around 700 per door. The other is 119900 with 5 units in a bit rougher area I don't know that I'm comfortable with this one but it may have better income if the area isn't as bad as I think. I was really planning on waiting another 8-12 months before getting into real estate this was because that was going to give me time to build a bit more of a nest egg to invest out of. Thoughts anyone?

@John Leake  I think its great that you have a friend that trusts you, believes in you and is willing to front some money for you to get you involved.  I would caution getting into a partnership without any experience at all, especially with the arrangement you described with you managing the property.

The property manager is basically the key to the success of the property and you just described that the PM on this deal had no experience, you.  Why not search out deals where the income makes sense with a professional PM?

Is your goal to become a PM?  If so why not just have your friend hire you for a similar fee that he would pay a professional PM? This way you could get experience as a PM and he can fire you if you are terrible ;). Also, PS many times to be a true PM you do need a license to negotiate leases etc. You need to look into your local and state laws. Double check that.

Are you handy ?A good plumber?  A good electrician?  A jack-of-all-trades? Your partner is not?  Do you have connections to tradesman that can get things done and know how to manage them vs your partner who does not?

Partnerships are about 1 + 1 = 3. Always.  If you are not filling the void of each other's weaknesses and enhancing each other strengths the partnership will be stressed over time.

Is your partner just the money guy and does not want to do any work and is very interested in getting involved with real estate but is really just wanting passive income from the benefits of REI, thats fine too but know that he is really a money partner, which is also important but that would mean a different type of partnership and different expectation of you.

Sit together and really discuss what you want from each other.  Ask the really hard questions.  

Sorry I don't have a crystal clear answer but I would view your relationship with your friend as a real positive.  You have someone that believes in you and is willing to work with you. That's a really great first step.  

Chris Jackson thanks for the reply sorry for the delayed response work has been crazy. I think sitting down and coming to specific expectations is a very intelligent way to start this process. Knowing what each person can bring to the table is certainly important and currently with my job I don't really believe I have the time to be a property manager. I think the best I can do for him currently is to try and help him look at deals and be his eyes on the ground maybe more of a wholesale role but I mean that in name only since I haven't got enough experience to be able to pick out truly solid deals. I also do have some skills as a handyman and if it's something beyond my skill set my brother is a carpenter for a living so I have that resource available to me. What is the best way to find property management in my area Google?

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@John Leake Finding a property is basically the game my friend.

Most people underestimate this part of the success story. They hustle to find deals, analyze them to no end, maybe even find a really good deal.  They buy the property, property manager is not that great, income goes down, expenses go up, investor scratches their head wondering what happened at best.  

To find a great property manager prepare to put in a lot of work just giving yourself the best chance to have the best of the lot hopefully.

- yes use google
- call realtors of multifamily asking them for PM recommendations
- contact local REIA and go to local REIA meetings and ask around
- go on infousa and search for PMs in your local area
- mail and call all of them 
- when you talk to them ask them the following questions
  • How many units to do you manage?
  • How many units do you own?
  • How many units do you manage in the asset class similar to what I am looking for?
  • What is your lease fee?
  • Do you have any refunds if tenant becomes delinquent within a year?
  • What are you average fees for R & M?  provide and example.  what do you charge to get a unit rent ready assuming paint and carpeting for a 1000 sq ft unit?
  • What % of collected rent do you charge?  Do you have a minimum?
  • What is your contract length?  If we are dissatisfied what is our minimum termination notification period?
  • Provide 3 references from owners
  • Provide at least 3 properties like mine you manage ( go see them , drive by the properties periodically to see if the manager does a decent job), go by the property and ask the tenants what they think of the PM, tell them you are an insurance adjuster

There are many more but these are a start.

Yes this is alot of work but 95% of all investors do not put this kind of due dillgence in.  Even when you do this kind of DD you can still end up with a dud.  Always have choice #2 PM ready for a hedge.

Hope this helps.

great post. i have few questions regarding partnership.. My newly partner and I are about to buy 2 properties, do we need to form structure entity LLC with partnership agreement after purchase is good idea? understanding 'due sale immediately' if occurred.

the other option we were thnking  the deed goes under his name only and have partnership agreement? This way, we figured  we can purchase more property later on as individual due to fact fannie mae limit indiividual to having 4 properties tltle to each individual? what are some of your thought

just abit confused with partnership with LLC...thanks in advance

@Jim Chung I thought the LLC owned the property and then the people involved own the LLC It may also be wise to set up individual LLC for each property that could make it easier down the road if one of you wants out of one property but not the other. I'm not sure if these LLC's owning property count against the individuals for loans or not though.

@Jim Chung you are entering the zone of needing an attorney to tell you what to do next or a mentor if you have one.

The creativity that is possible within structuring partnerships is vast. Its going to take some time for the level of complexity and options to sink in.  Give it time. Hopefully you have an attorney that you can talk to for about 15-30 mins to begin your knowledge journey within the partnership universe.

Start simple