Logistics of a 50/50 Partnership Deal

[Zane Lyons]

Hi folks,

This is probably a simple question, but I'm having a bit of trouble finding the exact layout of a 50/50 partnership logistically, e.g., title, loan, funding etc.

I am looking for my second value-add deal and found a partner who is willing to invest purely financially and split 50/50 if I find the deal and do the work to rehab and find tenants (or flip).

We have discussed some ballpark numbers, but I'm fairly certain he is willing and able to stretch it if the right deal comes along. He has a decent amount of liquid cash and mentioned he could pull out an equity loan if we really needed to buy something cash, but he will likely be getting a mortgage in his name.

My questions are mostly based around the logistics:

1. Do I need him to get pre-qualified for a second mortgage/vacation home mortgage/anything like this before I find a deal? Again I have ballpark numbers, but don't have a hard line of what he could get a mortgage for and not.

2. Assuming I find a deal and we both agree to it, do we then form a joint LLC, sign operating agreement, open a bank account etc. that he transfers money into?

3. I assume we put the deed in the LLCs name, but the mortgage would be tied to him directly. We have a good relationship, but he did mention concern about having the mortgage solely in his name while each technically having 50/50 ownership of the property. Hypothetically, were I to run off, I would still own 50% of the property and have no obligation to the mortgage... right? I would like to quell his fears about this.

Any other tips of the more banal side of structuring a deal like this would help me wrap my head around it. 

[Lawrence Potts]

@Zane Lyons, those are really good questions. I think partnering up is great. However, exit strategies become even more important with partners. That's why I like partnering on flips, long term is subjective as far as how long is long term for each person. For example:

If you guys are looking for a 10 unit apartment value add deal, is he wanting to be paid out and done after 5 years? How will you two resolve that if the mortgage is in his name? Are both of you guys going to be on title?

I think the reason why it's hard to find anything because every deal is different, there's no real copy and paste model because individuals differ and have different goals. I'll try to answer these the best I can:

1. Yes, he'll probably need to be preapproved or at least in communication with a mortgage broker about what he is wanting to do and how much he could afford. But value add deals like this differ if it's a true DSCR type deal.

2. That's 100% between you two and I don't think we can give a true right answer, just a lot of wrong answers because we don't know you two. But I would highly recommend using a real operating agreement (not a generic one off of google) and go through it together with your partner. 

3. Those fears make sense. What if you two close and you take off and never do the rehab yet you're on title and he has to pay 100% of the mortgage? 

My only tip would be to hire a real estate attorney and pay the price they'll charge to go over all of this and get it in writing. Better pay this cost up front than pay the heavier more severe and less forgiving cost of a partnership falling apart like a bad divorce. Protect yourselves and be upfront and overcommunicate with your partner and the attorney! Hope that helps.

[Andrew Postell]

@Zane Lyons thanks for posting.  I'll answer these one at a time if you don't mind:

1. Do I need him to get pre-qualified for a second mortgage/vacation home mortgage/anything like this before I find a deal? Again I have ballpark numbers, but don't have a hard line of what he could get a mortgage for and not. - So technically, no, you don't need him to get prequalified.  You would get a loan under your PARTNERSHIP.  That's the right method to use.  Get prequalified by your PARTNERSHIP.  Any commercial or DSCR loan (well, any good one at least) will lend to your partnership.  That's the right structure here.  You do not want a personal mortgage to go into either of your names when you have a partnership structure.  There's lots of reasons for this...get the loan in your partnership's name.  Getting prequalified is free to do and you don't need specific numbers in order to be prequalified.

2. Assuming I find a deal and we both agree to it, do we then form a joint LLC, sign operating agreement, open a bank account etc. that he transfers money into? - You should absolutely do this right now BEFORE you find a property.  What if you find a KILLER deal...but you have to close in 10 days?  That's not enough time for you to create the company and open any bank accounts, and that might be needed for a VARIETY of reasons to buy a property.  Get that partnership formed right away and open those bank accounts.  You don't want to miss out on a great property because you don't have your paperwork completed.

3. I assume we put the deed in the LLCs name, but the mortgage would be tied to him directly. We have a good relationship, but he did mention concern about having the mortgage solely in his name while each technically having 50/50 ownership of the property. Hypothetically, were I to run off, I would still own 50% of the property and have no obligation to the mortgage... right? I would like to quell his fears about this. - This is exactly why I say to get a loan that is NOT in either of your personal names.  Not only does it open you to liability risks...but any personal loan means you are personally liable for that loan payment.  This is part of the "VARIETY" of reasons I mentioned above.  So if you are personally liable for a loan, that means it's on your credit.  It could affect how someone might qualify for OTHER things later.  When you are personally liable for a mortgage (like with a Fannie/Freddie style loan) you are personally liable for 100% of the payment - even if you have a co-signor.  A co-signor just allows someone to qualify for a loan who would otherwise not qualify.  It does not split the obligation 50/50.  With Fannie/Freddie every co-signor is 100% obligate for the ENTIRE payment.  So if you are responsible for 100% of the payment...and you are splitting your profits with your partner...you see where I am going,right?...then you will be showing a loss on the property!  I hope you are getting what I am saying.  Having a personal loan in your name, that should be under a business, could jeopardize you from getting a car loan, a student loan for your child, even another home. This is one of the main reasons why we put the mortgage in our PARTNERSHIP name.  Now there are some ways around what I am saying here after 1 year....but why even risk it? And then there are still a "variety" of other reasons why to not have it in your personal name. Just get the loan under the business name and everything works out. 

*WHEW*  I hope all of that makes sense but feel free to post anything else.  Thanks!

[Zane Lyons]

@Andrew Postell Thanks so much for this! This is exactly the sort of advice of I was looking for. I sincerely appreciate you lining out each point and will get our paperwork sorted immediately. One follow-up if you don't mind — is it not significantly more difficult/more expensive to receive a loan under a brand new partnership with no business history? I assume the answer to that is laid out in the first point: we can find a lender that is lending on the property's DSCR at which point the freshness of the business is a moot point. Is that right? I suppose we wouldn't have some of the benefits of traditional Fannie/Freddie loans (lower rates and ease) but the benefits would be the ability to lend on a much wider variety of assets.

@Lawrence Potts Appreciate your response as well Lawrence, I will definitely make sure we line out a precise exit strategy (in writing) and will have an attorney write up our terms. Thank you very much for your response!

[Andrew Postell]

@Zane Lyons thanks for the kind words.  Some lenders will have an issue with a partnership being new...so you may have to lean on some other investors to point you in the right direction... but there will be some that will lend to your partnership.  They do exist.