The inventory of the market I am looking to invest in is pretty low. As a result, there is a great deal of cash buyers which makes it difficult for me to be competitive. This is one of the reasons why I am considering partnering with someone that has enough capital to buy properties with cash.
What are the different ways to pursue deals with a partner that has capital? For example, if I am looking to purchase buy and hold SFRs and/or MFRs, how could my potential partner and I structure the acquisition of the deals? Two potential ways I imagine are setting them up as a private money loans or doing owner financing.
Any ideas? Looking forward to hear from any BP members that have worked with partners.
Thanks in advance!
@Shawn S. First you need to decide if you are partnering or borrowing money.
If you are partnering you either both need to sign the contract for a residential loan or you can set up an Limited Liability Company. You will most likely need to take a commercial loan if you attempt to buy through an LLC.
Then you need to decide on equity and operations. If your partner puts up all the money will you do all the work for free? Or will you structure your entity so that the equity reflects the Capital contribution?
There are still a lot of properties being sold that are using traditional financing. I would not give up just yet. I would ask your agent what you need to do in order to be competitive on the next one.
Partnering can be very tough in RE. Most people own rentals for 20+ years. That’s a long time to be in a partnership, chose carefully.
Wow. This is so weird because I shot a video Tuesday night about how I use Propstream to find investors to partner with. I haven't cleaned it up yet, but here's a down and dirty version:
Partnering is one of the best paths to success when you figure out what you're good at and what they're good at. Essentially, what is everyone bringing to the table.
So, first of all, what are you good at and what do you want to do in the partnership?
What I'm good at is developing marketing systems because I've been in digital marketing for almost 20 years. But I don't have the time to close deals because I also run a digital marketing business.
That's why I look to partner with wholesalers that don't know how to generate and nurture leads but have the time to reach out to these hot leads.
Now, in your case, I've partnered with people where they provide the deal and I provide the money (or vice versa) and, basically, we've set up the deal where I own the property but we split the profit. I do it this way because while I could pretty much give a crap about anything but the numbers, I essentially want veto power.
However, when it comes to leads that I generate and nurture, I give the wholesalers a lot of latitude to make deals because I trust my partners to know their area better than I do.
That's a good point. I suppose I haven't thoroughly considered the differences between forming a partnership and seeking financing.
Would you agree that the main difference between the two is that when borrowing from a friend/family member you have an agreement to pay him/her back by a certain time with a certain amount of interest, whereas with a partnership you have an agreement to share with him/her the equity and cash flow from the investment?
Also, I know what you mean and agree with you when you say to find ways to be competitive in the market, especially if you're using traditional financing. It is nice to learn that there are still properties being sold using traditional financing -- thanks for the encouragement!
Do you have any recommendations on how to be more competitive?
@Shawn S. Yes that is the main difference with one other point. You and your partner are not just splitting equity and cash flow, you are splitting headache's, labor, Capital contributions, management, and decision making. There will be plenty of all.
Your agent should have better answers for you. He/She should be telling you what is needed to get a property. When I am dealing with someone with an FHA loan for example, I explain we will probably need to beat everyone on price since there is an extra FHA inspection and we are putting less down.
There are other things you can do in your contract like waive an inspection, put more money down, etc... to make your offers more competitive. We have beat out all cash offers before. I have also taken a higher FHA offer over a lower cash offer in the past.
When I write a deal for a client I am telling them what we have to do in order to win the deal. Your agent should do the same.
I think It would be really helpful to know approximately how much money your team will start with And what your goals are, as there are a endless ways to form a partnership.
Buy and hold is a great way to start investing. It’s low risk. It’s long term and fairly low time involvement. However, you need a plan to scale that. Unless your partner has tens of millions of dollars to invest, I would assume you will still need to leverage your deals with a loan. Start with conventional (house hacking) and bank loans, then look into hard money or private money loans.
Will you be buying 1-5 properties? Or do you want to own a portfolio of real estate down the road? Assuming the latter, you will need an exit strategy to get your money out of those first few deals so you can continue investing. That's why most people BRRRR - buy rehab rent refi repeat. This way you typically will recapture your investment during the refinance process, assuming your values are hit.
Depending on the plan, you will structure your partnership accordingly. The big decision is equity vs debt. Do you want this partner long term or just in the first few deals. If just for a few deals, then you can do a JV Agreement, deal specific. Most investors structure an LLC when real estate investing. The terms of their partnership and capital investments are detailed in the Operating Agreement. You can hire a CPA to help you form the LLC or Corp or LP (rarely used). Most agree that this type of entity structure is quite beneficial if planning to own numerous properties.
The terms between you and your partner are completely up to you two. Generally the goal is to split 50/50 with the capital partner, assuming they are mostly a silent investor. If you are just starting out, I would suggest being open to taking a lower split and finding someone with capital AND experience. Experience is key.
Thanks for your sharing your knowledge on ways to structure partnerships.
I am still in the educational phase of real estate investing, and, therefore, am currently learning how to leverage my existing skills towards my investing career. Once I have a few (or more) deals under my belt, I think I will have a better idea of what my strong suits are in real estate as well as the areas where I am not so strong. Perhaps then I will know what to look for in a partner.
I think I am now realizing that finding a lender may be a more attractive approach for me at the moment.
Thanks again for your input!
I like your FHA example. It makes sense to understand the bottleneck(s) with certain financing routes and use other terms (e.g. offer amount and inspection) to your advantage.
I will be sure to keep these things in mind when working with my agent.
That's totally understandable. And I'd suggest that you can narrow strategies down by looking at what you've been good at in previous jobs and what you absolutely hate doing.
Like I said, I'm really good at digital marketing and getting leads BUT because I have a vision problem, I can't easily go investigate properties. So, I've chosen to focus on lease options.
My friend on the other hand, loves fixing up houses and then selling half of them and renting the other half.
Each of us is great at what we do but would be horrible at what the other does.
There have been many posts on "finding a partner" and "how to structure the split." Honestly, the concensus is there aren't any good answers.
Firstly, I agree that you need some sort of legal framework when working with non-spousal partners. Either you go into business together and form a legal entity such as a LLC or perhaps a partnership, or one is more of silent partner providing financing (which can still happen with a legal entity) who basically holds a Note.
In terms of structuring the deal, it sounds like the typical "they" put up the cash and "you" do the work... For some people (very rare), it works for them to do a 50/50 split (of some sort).. but here's why its difficult to make it work (both my opinion and summarizing other posts, honestly).
Investors make money using their money and potentially others via financing/leverage from the PROFIT of the deal. Just basic income minus expenses... Workers make they money by doing a job, either by the hour or by the task/project. Basically, some sort of hourly wage is thought of here.
These are two different, and opposing , methods of income. Its similar to when people try to equate commission income, which is not guaranteed for one, to salary/wage rate incomes. Its pure apples and oranges.
Lets take an investor flipping/rehabbing a house. The investor is out all the cash for the rehab. However, whatever happens everybody else gets their pay, e.g. the carpenter, the electrician, the laywers, the title agents, the insurance company, the demo guys, the flooring company, landscaper, etc. The investor has their cash at risk. The workers have no cash at risk.
Now, lets try to circle back to you.. If you partner with somebody to do a deal (whatever sort), what sort of risk are you willing to take? What are you willing to put up? Not just cash (which I believe you've established you don'tabundance), but what if the project does not turn a profit? Every discussion BP seems to hinge on this as the "workers" will "complain" that they have to be paid for their time (i.e. the laborers they hire), the materials they have to buy, etc. Well, if you the "working partner" won't take the downside of the 50/50 split, then you really just another "hired hand" to the investor.
Investing is taking the risk of also LOSING the money. Unfortunately, everything is always about how real estate investing is about making money. Well, like stock investing, you can lose it, too. Its investing, not a "job" where you have some salary or wage. if you can't afford to potentially lose your money, then perhaps you shouldn't be investing -- that's a common advice for stock investing or other forms of financial planning.
Sorry for the long post. I think your question is along these lines. The rest of the discussion seems to be a slightly different portion of the topic. I don't have a good answer for you, nor have I seen one. Good luck.
Lots of information in this one -- time to bring out the handy dandy notebook!
This may seem like a silly question, but when you say "Start with conventional (house hacking) and bank loans..." I assume that you are suggesting that I start with house hacking then find a partner and fund our deals with HML/PML? Right?
The is actually exactly what I am aiming for: house hacking my first home, then using the BRRRR strategy with HML/PML. I am interested in utilizing the FHA/203k loan to purchase a fixer MFR to house hack and cash out refi to access the added equity for the down payment for my next investment.
Regarding structuring deals within an LLC, I actually just sat down with a CPA yesterday to go over my goals and hear his thoughts on how to use LLCs in real estate investing. Our discussion was mostly in agreement with what you have stated; however, he cautioned me about the dangers in starting a partnership.
I appreciate you taking the time to reply to my post. After reading yours and the other responses, I am realizing that this is a difficult question to give an answer to. There is no cut-and-dried answer. It is very specific to each scenario.
Your mention of working with a silent partner who holds the note is one strategy that I have thought of but didn't know what to call it. Now that you have shed light on the name of the strategy I can dig a little deeper into that, as I believe this may be an attractive route for me.
No problem. Yes, there is not clear cut answer as everything is negotiable --- its business.
Yes, it would look like you are looking for some sort of private money (investor) or a silent investor/partner.
If you are looking for capital/financing and not some sort of partner, maybe consider a hard money lender...