Partnership structure - buy and hold

3 Replies

I've been searching BP for a couple of days now, with little results. Hoping that someone can help me. I'm trying to understand what is the best way to approach a partnership structure for buy and hold properties where one partner is the finance (100% or close to) and one is the locate, manage rehab, manage property, and manage future sale (5 years or more down the road).

I'm the one who is not bringing the finance.

From what I've been able to see, there are a lot of posts on 50/50 partnership splits for profit, etc where one partner funds and other other partner does the legwork if it is a flip, but so far there is very little info out there for this approach with buy and hold.

I've seen some comments stating that it would be surprising to find an investor who wanted to do this as the returns are not that great. However, if you are in a neighborhood that is quickly transitioning and what is a $40k home today is going to likely be worth $100k+ in 5 years, does this change anything?

...but there lies my biggest concern, while I am investing in areas that I believe are going to appreciate dramatically as that is where some real money is to be made, I am buying to cash flow and not guaranteeing to myself or to anyone that the appreciation will really happen. Without this, does it still make sense for my finance partner to work with me?

For those experienced investors who have done this, how have you structured deals for buy and holds and what books, templates, or other resources can you point me to?

@Alex M.

You need to get what you can from the deal with a good return for everyone involved.  Most folks here on BP would be quite happy with a 15% Cash on Cash return if all we had to do was write a check.

My strategy for that:

1. Find a property with 20% Cash on Cash return and appropriate monthly Cash Flow.  Monthly cash flow is up to you to decide.  It obviously varies quite a bit by how much you paid for the place.

2. Give the cash investor 75% of that.  They are now looking at 15% assuming nothing changes.

3. Separate the property management portion out. To the partnership/LLC/S-Corp it should look just like an expense. Even if you are doing the management yourself having it billed into the partnership allows for simple accounting at the end of the year. This allows you to remove yourself later without having to renegotiate the partnership agreement.

4. Don't be an asshat.  This seems like it goes without saying, but you'll find yourself not doing your part to the best of your abilities at some point in the future.  Family gets sick, kids have games, spouses travel and life moves forward.  Let the partners know what is going on regularly.  Sometimes you are an asshat and you need to work a little harder the next week to make up for it.

@Alex M. I'm in a very similar situation. Did you ever figure this out? If so what worked best? Thanks!!! 

@Rafael Brown I did. I don't know if my approach is the best for everyone, but it is working for me to build a part of my portfolio. I ended up structuring a 50/50 deal with a cash partner. In this partnership, my partner put in 90% of the cash as well as a bit of time and expertise in around items like taxes, bank finance, etc. We've done a few deals together in this way and currently hold 10 properties together - with an additional 3-unit closing next week.

The basic structure made sense for me to get started - my partner provided the cash injection and I provided the time and effort to find the properties, fix the first couple and/or manage the contractors. Initially it seemed like the relationship was skewed in my favor - why would my partner want to put money in to only get 50% of a deal when he could just buy the property himself and rent it keeping 100% of cash flow and equity. However, now that we have refinanced a number of units and are beginning to use bank money for purchases as well as BRRRR methodology, it has flipped to be more in my partners benefit - I do 90% of the work and only get 50% of the deal... but I am fine with that. This partner has helped me to get started and I am happy for him to make great returns within this partnership moving forward. I also do buy and hold some on my own and in a second partnership, structured similarly.

One thing that helped also is that as we started to scale up a little through the first round of refinancing, we shifted to 100% of cash input from my partner and 0% from me to adjust the balance a little. I also take an 8% management fee on the properties now - I did not for the first year. The rest is split 50/50 (equity, cash flow and expenses). 

So far this has been a very good partnership for me. Good luck with yours. I hope you can figure something out that will make sense for you and your partner(s).

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