Evaluating a Partnership

17 Replies

I am currently evaluating a duplex purchase in the Cleveland area. I feel pretty confident in my evaluation of the property, and think it would be a good candidate for BRRRR:

Purchase Price: $130k
Rehab Cost:$47k
ARV: $225k
Monthly Rental Income:$2400

I am currently planning on buying the property with a conventional mortgage and financing the rehab myself. After completion of the rehab, I would not have any cash outside of emergency reserves. After a year of holding the property I would refinance, collect around 40-50k, and buy another one.

Over the past month, I have had a friend approach me about going in with me on a property. I have not yet put a proposal together, because frankly I’m not sure what a proposal that would be beneficial to both of us would look like. I would manage/perform all of the rehab, along with managing the tenants. If I am able to do the work with my own cash, am I gaining anything with a partnership, or am I better off doing the deal on my own?

 You need to figure out what your goals are. If you want to build a massive rental portfolio then having strategic partners can be very beneficial. If you just want to buy a handful of rental properties then having a partner would probably be more of a hindrance. It sounds like you do not need a partner to buy a rental property or two so if that was your goal don't partner. If your goal is to do this full-time then you may want to look at partnering. By building partnerships upfront on different investments it will help you expand your network and build your portfolio even faster. You can decide if you want to make this a partner on every single deal or just make it property specific.

Thanks Todd, my goal right now is to buy 10 properties over the next 10 years, targeting mostly multi family homes in middle and upper class neighborhoods in my area. I’m 50/50 on whether I would want to use a partner. What would the basic structure of a deal for this type of property look like?

It’s a huge side by side duplex on the west side that has almost 1400 SF per side, so the ARV is a lot higher than typical duplexes in the area. It’s extremely dated with a bad roof and choppy layout, but is otherwise in good shape. There are not a ton of comps, but most of the comps I do have went between 210 and 250 for units that were in turn key condition with higher end finishes. Also, my numbers still work if I don’t quite hit 225.

I guess the primary thing that this partner would bring to the table is access to capital for the future. Right now, I’m thinking I may just pass on using a partner on this deal because it’s a buy and hold play. I would like to try to do a flip after this property is wrapped up and am thinking that might be a better investment to go in on with a partner.

To add to Federico's question, where are you renting a duplex at $1200/unit? From my research, you are lucky to rent a SFH for that price. Zip codes please.

If this is your first deal, it appears you have the knowledge, confidence and resources to complete this transaction for yourself.  I would tend to going alone with this project.  You don't mention much of what attributes your friend will bring.  Moral support is not good enough. 

This property sounds like it could be a nice long term hold and can provide a basis for some predictable income and still have the possibility of acting like a bank for which you can access some of the equity from time to time as needed.

Bring in partners who have more experience than you , or more capital to spend, or have more rehab skills.  If you are buying your first property and you have the resources to do it going alone may eliminate a lot of headaches.  

@Brian Gallagher What exactly is the friend bringing to the party? A JV partner can either bring cash or expertise. From what you're saying, you can fund it yourself and you'd be doing the project management, so what is your friend doing? The only advantage I see is if you don't want to risk your own funds or you want to share the risk.

@Brian Gallagher @Federico Gutierrez  

I do not believe you were asking on the quality of the deal, nor have you provided enough information to assess that. With regard to partnering Federico sums it up pretty well. Begin a partnership if it takes your company to a new level. I believe the other question you asked is "What would the basic structure look like". You can use an LLC to own the property. Within the LLC's operating agreement, you can spell out all the various terms as to how to manage the company. The operating agreement in essence becomes your constitution which governs the company.

Scott Krone, Developer
(847) 272-7775

Tyler - Lakewood, OH. You can also find similar rents in Ohio City and Tremont. I recently sold a duplex I was holding for a while that was renting out around 950 per side at 900 SF per unit. I probably under listed it based on the amount of applications I would get when I listed it. The house I am looking at has some oddball features that make it more marketable than a typical duplex (side by side, a lot of square footage, and next to a park). That being said it varies a lot from street to street in those areas so you have to do your research first. Additionally, multi family prices have skyrocketed over the past two years (which is why I sold). The price that I am getting this unit for is not common, but you can still find good deals if you are willing to take on units that need work or landlords trying to unload properties. I have lived on the west side for over 5 years so I know the area very well, and I am confident in my numbers.

Joe- thanks for the advice, I think that’s the direction I’m going to go.

No, just a through a landlord that lived nearby me.

20%, but the vast majority were at 25%. They are a lot tougher on multi family homes than single family investment properties.

@Brian Gallagher someone may have already stated this but looks like you can handle this on your own. What value does your partner bring if you found the property, you will rehab it with your money and you are managing it???

All the best to you and welcome to BP!

Jorge

I guess I didn’t explain it well, but if I used a partner he would certainly have to provide me with at least half the funds for downpayment/rehab.

@Brian Gallagher makes better sense. So if all he is bringing is half the money for either down payment or rehab and he is not going to spend anytime being involved either with doing the work, making decisions or managing the property then you must value all that you will bring to the deal. To me that sound like an 80/20 deal in my opinion. 80 for you and 20 for him. All the best to you!

Jorge

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