Question- there is probably a cool, professional way to word it, but I was wondering: if I wanted to work/partner with a friend of mine who has the funds -but none of the time, knowledge, or contacts to find and manage properties- I would find the properties, find renters, and manage the property, and he would lay out the %25 down payment. What is a fair way of splitting the ownership and/or division of profits (from both cash flow, and an eventual sale)?? I would present the deal to him, and if hes interested he would lay out the funds..
(I am not interested in just borrowing the funds for various reasons; mainly because I have this uncomfortable feeling of owing a friend this much money...even if I know it's somewhat secured in a property)
Is 50/50 split ownership fair? or is that too much for me as I have no money invested? What is "typical" in the REI world? and/or what do you think is fair regardless?
Daniel, would your friend be participating in any way in managing the business? Or would he/she simply be loaning you the money? Your parenthetical reads to me like you don't want to just borrow the money, but your description doesn't look like your friend would play a management role. My attorney has advised me that I should only partner with someone when they play some role in the management of the project or when there is a clear description of our roles and duties within the partnership. As I understand it, if the "partner" doesn't play any role in management, then they are a "lender" and not a "partner" at all. Here's a link to a blog article on the subject. Full disclosure: I am a client of the author's law firm but this article is not an advertisement and is freely available for information/education purposes. Hope this helps.
thanks @Caleb Asbridge!
I was thinking of forming either an LLC or owning as tenants in common. I dont understand why it has to be a loan even if I do all the management?
@Daniel Rubenstein I would say just have an agreement, that you get 25% of net profit, and yes, I said NET. You have no risk, all you have is putting the deal together, and without his money or credit, you will have nothing to contribute monetarily. 25% of something is better than 0% of nothing.
@Daniel Rubenstein ...I can understand your being uncomfortable about borrowing the money from a friend but how about the bank or other lender? I would feel fine as the only one bringing in money on a flip that my non-money partner found, and giving that person 50%, but no way would I give up 50% of the cash flow to someone who manages a rental I'm on the hook for. I would say take a management fee monthly, if you can do that without a license where you are, and make your money on the back end with a percentage you agree upon. Be sure a lawyer draws up the agreement.
Hey Daniel, I don't mean to present anything as a "has to be" situation, just wanted to share the advice I've received and some info. I think it's important that you both are clear in your roles and how each of you would be compensated in the end. This can be done through an operating agreement, within your articles of incorporation, or another vehicle as advised by your attorney. But even in the clearest agreements, each partner has a percentage of ownership and therefore has some say in the management of the operation. I believe this is the case even when you agree that one partner will carry the management duties. This is why I was advised that the cleanest way to manage 100% of the entity with the minimum chance for dispute is to treat the person who is funding the deal as a lender as opposed to a partner. Sorry for not being clearer on that point. All that said, I'm not an attorney and am limited to my own experience. There may be others with different experiences.
I have a similar situation though not a friend. One of my partners puts up the money for the flips and I manage the flips. We had an attorney draw up an LLC and write up the partnership agreement. The difference in lending vs partnering in my opinion is that my partner assumes half the liability where a lender would not share that risk. If we lost $10,000 we would split that loss. If I lost $10,000 and had borrowed from a lender then I would be out $10,000...if that makes sense. I work with several "partners" and each is handled a different way. Some just lend money (which I prefer) and others want to split profits. Even when they put up all of the money, I would not take any less than 50% of the profits. Don't discount your importance in the deal. Without you, they wouldn't even have the opportunity. Good Luck.
great tips all around! Thanks!
Seems to be opposing arguments here- 1) Without the money man, I would have nothing-so better a small percentage of something than nothing.
Or 2) Without me, the money mans money would be sitting in a bank and losing value yealy to inflation. I am doing all the work so I deserve %50
Interesting...still not sure where I stand..
Both deserve merit. I agree that a % of something is better than a % of nothing. When someone says " you give them half of the profit?" My reply is " 50% of nothing is nothing." I'd rather half 50% than not get the deal. However, some of my flips only net $20,000. I'm not going to do all of the legwork for $5,000. In the scenario that was presented above, he was referring to net cash flow from rents which is different than net of a flip. I would want 50% equity in the property. As far as the rents are concerned, I would figure in property management as part of the costs and either pay yourself or an outside management company. Then figure out how the 2 of you want to split the remainder after expenses.
I reviving this older thread to get some opinions on this very topic. Great discussion so far.
I already have a couple of buy-n-hold rentals in my SDIRA that I purchased with cash, and would like to add more either in there (where non-recourse loans are needed) or outside of a SDIRA. I do NOT have a lot of my own cash outside of my retirement funds. I do have connections for rehab if needed, management experience, knowledge, etc....
I have a highly potential financial partner who is also a friend. He is interested in talking about loaning funds to me or investing. We are exploring several different options.
A couple of his parameters are:
- He would likely NOT be interested in being the 'signer' on a loan if he provided the down payment.
- He would be interested in both short term lending (thinking refinance out of properties that were bought at a large discount to current value)
- He would also be interested in longer term (15 years or so) lending or investing. It seems his preference would be lending, but is open to partnering if the returns would be right.
Me questions are how to best use this possible resource to further both my financial position and have him be a happy partner too. We are both much more interested in long term returns compare to current cash flow. We are both about 15 years away from retirement and would not mind holding these for income in retirement years. He does not need income (he would be building his estate for future hiers) where as I would need the income in retirement.
- If we were to go the 'conventional route' of a 25% down loan, is there any type of partnership, JV, etc... that would allow just one of us (me) to do the personal guarantee?
- He would have funds to buy a couple properties outright, but it seems like it would make more sense to leverage the funds with todays current interest rates, no?
- What are thoughts on him lending to me in my SDIRA vs outside of it.
Thanks, Dan Dietz
There is no right or wrong answer -- it's whatever the two of you agree to and are happy with.
How much would make you happy? How much would make him happy?
If you don't know the answers to those questions, we're not going to be able to help you. So, get those answers and come back to us (though I have a feeling that once you have those answers, you won't need us :-).
@Daniel Rubenstein - Since this has been resurrected what did you end up doing? I have a friend who's lending me money on a deal right now too...so I'd be curious where your experiences ended up.
@Daniel Dietz - @J Scott is an authority on this...so take my response with a very very small grain of salt. Rather than setting up a JV or anything like that you could secure the funding with a second position on the property. At least two banks I've spoken to, are comfortable with the 25% downpayment coming from 3rd party funding in a secondary position. My friend reviews all the deals, and has to be comfortable enough with the spread that he doesn't mind putting his money there. Even still he gets a pretty decent return, not as good as hard money, but much better than sitting in a bank. I think this is fair since without him I wouldn't be doing the deal in the first place...and it means we get to grow together and make sure i'm only looking at good deals.
How much you leverage his funds depends greatly on both of your risk profiles. I would think with 15 years to retirement you're going to be on the more conservative end. So I'd say do the math backwards. How much cash flow do you need to be comfortable retiring in 15 years? How many properties do you need to buy to get there? Allocate capital accordingly to each property so that you can have them paid off on a 15 year note and have the cash flow you're looking for.
I can't really comment on your inside or outside of the SDIRA question...that sounds like something a CPA would need to advise you on.
Best of luck!
Originally posted by @James Masotti :-
@J Scottis an authority on this...so take my response with a very very small grain of salt.
I just realized that I was responding ot the original poster in this very old thread, as opposed to the most recent poster.
Sorry about that! Ignore my post above... :-)
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