Partnership advice on multifamily deal

12 Replies

Hey BP, I am currently looking to partner on a small multifamily deal with a friend. Basically my friend will put up the money for the down payment and I will handle everything else. My question is how should I handle the bank account in which the rental income will go. Should I keep an account in which I only have access to and pay him out of the cashflow. OR should I setup an account in which we both have access to so that he can be reassured that there is actually money in the account and not going to other places. Thank you! Kellen

For transparency and trust, I would have a joint account with him where he can check on line the status of income and expenses. We are in the same situation ourselves in the past, and part of your job, and ours, would also include preparation of the "Schedule E's" at year end for tax reporting purposes. Hopefully you can do the tax reporting on a timely basis, which we sometimes mess up on.

Originally posted by @Kellen Driscoll :
Hey BP,

I am currently looking to partner on a small multifamily deal with a friend. Basically my friend will put up the money for the down payment and I will handle everything else. My question is how should I handle the bank account in which the rental income will go.

Should I keep an account in which I only have access to and pay him out of the cashflow. OR should I setup an account in which we both have access to so that he can be reassured that there is actually money in the account and not going to other places.

Thank you!

Kellen

 I would not open a joint account. This will give him same access as you have to all the funds in the account.  This is completely unnecessary in my opinion. If you hired a PM, will he be giving you access to his bank account? I don't think so. 

As a partner and manager of the property, what I would do is gjve the partner detailed report and copy of bank statements every quarter - maybe even every month. I will also have a very strong JV contract.. For any JV to work successfully, there needs to have some basic trust built between both the parties.

@Kellen Driscoll As an alternative to giving your partner access to the bank account, you can give him access to the application where you're keeping "the books" for this project. Any app would allow to set up a Read Only access where your partner would only be allowed to view the data without the capability to change anything.

Best!

Originally posted by @Chinmay J. :
Originally posted by @Kellen Driscoll:
Hey BP,

I am currently looking to partner on a small multifamily deal with a friend. Basically my friend will put up the money for the down payment and I will handle everything else. My question is how should I handle the bank account in which the rental income will go.

Should I keep an account in which I only have access to and pay him out of the cashflow. OR should I setup an account in which we both have access to so that he can be reassured that there is actually money in the account and not going to other places.

Thank you!

Kellen

 I would not open a joint account. This will give him same access as you have to all the funds in the account.  This is completely unnecessary in my opinion. If you hired a PM, will he be giving you access to his bank account? I don't think so. 

As a partner and manager of the property, what I would do is gjve the partner detailed report and copy of bank statements every quarter - maybe even every month. I will also have a very strong JV contract.. For any JV to work successfully, there needs to have some basic trust built between both the parties.

 I've been the joint partner in some real estate deals, and the money partner in others. If I supply all the funds, some partner tells me I have no access to the bank account, then I would not go through with the deal.

One business I started was a accounting consulting business and one of my customers had me install an accounting system. The business itself was located in NYC, with local management, and the money partner was in Europe. The money partner in Europe grew suspicious when the local management refuse to give him bank account info or access to bank accounts. The local management said, I gave you monthly statements, P&L and balance sheets, that should be enough.

What happened was the money partner hired a private eye to check, and found that all the financial statements sent from the local management to him was false. When the money partner rushed over to see for himself if it was true, I was asked to compare the statements he received from the local management, and go back to the system I installed, and the prior system, that I was also familiar with, and generate the P&L and Balance sheets, from prior months and years, and indeed they were all different.

I didn't do the financial analysis, but I learned later that over $200,000 was embezzled by the local partner, hidden behind falsified financial data. 

I don't even trust local management sending me copies of bank statements, because in many embezzlement cases I seen on TV, I recall "American Greed", embezzlers falsify bank statements as well, so the only way to insure proper accounting is to get the information directly from the bank. In most of these cases, scammers offering business deals of all types to investors, especially retirees pulled off the scam by issuing falsified bank statements to their clients.

As to the comparison to a PM, the PM collects the rent, takes his cut, and remit the rest. I know rather quick if the rents are paid, so it's not a JV model. In a JV model, I have no idea what the cash flow is any if.

Originally posted by @Frank Chin :
Originally posted by @Chinmay J.:
Originally posted by @Kellen Driscoll:
Hey BP,

I am currently looking to partner on a small multifamily deal with a friend. Basically my friend will put up the money for the down payment and I will handle everything else. My question is how should I handle the bank account in which the rental income will go.

Should I keep an account in which I only have access to and pay him out of the cashflow. OR should I setup an account in which we both have access to so that he can be reassured that there is actually money in the account and not going to other places.

Thank you!

Kellen

 I would not open a joint account. This will give him same access as you have to all the funds in the account.  This is completely unnecessary in my opinion. If you hired a PM, will he be giving you access to his bank account? I don't think so. 

As a partner and manager of the property, what I would do is gjve the partner detailed report and copy of bank statements every quarter - maybe even every month. I will also have a very strong JV contract.. For any JV to work successfully, there needs to have some basic trust built between both the parties.

 I've been the joint partner in some real estate deals, and the money partner in others. If I supply all the funds, some partner tells me I have no access to the bank account, then I would not go through with the deal.

One business I started was a accounting consulting business and one of my customers had me install an accounting system. The business itself was located in NYC, with local management, and the money partner was in Europe. The money partner in Europe grew suspicious when the local management refuse to give him bank account info or access to bank accounts. The local management said, I gave you monthly statements, P&L and balance sheets, that should be enough.

What happened was the money partner hired a private eye to check, and found that all the financial statements sent from the local management to him was false. When the money partner rushed over to see for himself if it was true, I was asked to compare the statements he received from the local management, and go back to the system I installed, and the prior system, that I was also familiar with, and generate the P&L and Balance sheets, from prior months and years, and indeed they were all different.

I didn't do the financial analysis, but I learned later that over $200,000 was embezzled by the local partner, hidden behind falsified financial data. 

I don't even trust local management sending me copies of bank statements, because in many embezzlement cases I seen on TV, I recall "American Greed", embezzlers falsify bank statements as well, so the only way to insure proper accounting is to get the information directly from the bank. In most of these cases, scammers offering business deals of all types to investors, especially retirees pulled off the scam by issuing falsified bank statements to their clients.

You have to have some trust with the person you are investing with.. PERIOD.. Your point is well taken that bank statements can be falsified. In fact, I am a huge fan of the show American Greed. But for one American Greed episode where someone scammed someone with fake documents, there are thousands of people doing it with all the ethical standards.

So here is another question to you. What happens if we involve 3rd person or 4th person in the deal? Do we give him/her access to finances as well?  Once you give people access to all the financial information, they start questioning your business decisions.. Why did you pay this much for a plumber.. This seems too expensive.. Etc.. Etc.. Etc.. You will have people micromanaging literally every single aspect of the venture. If the person with money is bringing his money to the person with expertise, then the person with expertise should be given level of freedom to perform

If you don't have trust developed amongst partners, then no point is doing joint ventures. 

Just my 2 cents..

Originally posted by @Alina Trigub :

@Kellen Driscoll As an alternative to giving your partner access to the bank account, you can give him access to the application where you're keeping "the books" for this project. Any app would allow to set up a Read Only access where your partner would only be allowed to view the data without the capability to change anything.

Best!

 This is a great idea.. I believe Quickbooks allows multiple people to access the portal. 

Originally posted by @Chinmay J. :
Originally posted by @Frank Chin:
Originally posted by @Chinmay J.:
Originally posted by @Kellen Driscoll:
Hey BP,

I am currently looking to partner on a small multifamily deal with a friend. Basically my friend will put up the money for the down payment and I will handle everything else. My question is how should I handle the bank account in which the rental income will go.

Should I keep an account in which I only have access to and pay him out of the cashflow. OR should I setup an account in which we both have access to so that he can be reassured that there is actually money in the account and not going to other places.

Thank you!

Kellen

 I would not open a joint account. This will give him same access as you have to all the funds in the account.  This is completely unnecessary in my opinion. If you hired a PM, will he be giving you access to his bank account? I don't think so. 

As a partner and manager of the property, what I would do is gjve the partner detailed report and copy of bank statements every quarter - maybe even every month. I will also have a very strong JV contract.. For any JV to work successfully, there needs to have some basic trust built between both the parties.

 I've been the joint partner in some real estate deals, and the money partner in others. If I supply all the funds, some partner tells me I have no access to the bank account, then I would not go through with the deal.

One business I started was a accounting consulting business and one of my customers had me install an accounting system. The business itself was located in NYC, with local management, and the money partner was in Europe. The money partner in Europe grew suspicious when the local management refuse to give him bank account info or access to bank accounts. The local management said, I gave you monthly statements, P&L and balance sheets, that should be enough.

What happened was the money partner hired a private eye to check, and found that all the financial statements sent from the local management to him was false. When the money partner rushed over to see for himself if it was true, I was asked to compare the statements he received from the local management, and go back to the system I installed, and the prior system, that I was also familiar with, and generate the P&L and Balance sheets, from prior months and years, and indeed they were all different.

I didn't do the financial analysis, but I learned later that over $200,000 was embezzled by the local partner, hidden behind falsified financial data. 

I don't even trust local management sending me copies of bank statements, because in many embezzlement cases I seen on TV, I recall "American Greed", embezzlers falsify bank statements as well, so the only way to insure proper accounting is to get the information directly from the bank. In most of these cases, scammers offering business deals of all types to investors, especially retirees pulled off the scam by issuing falsified bank statements to their clients.

You have to have some trust with the person you are investing with.. PERIOD.. Your point is well taken that bank statements can be falsified. In fact, I am a huge fan of the show American Greed. But for one American Greed episode where someone scammed someone with fake documents, there are thousands of people doing it with all the ethical standards.

So here is another question to you. What happens if we involve 3rd person or 4th person in the deal? Do we give him/her access to finances as well?  Once you give people access to all the financial information, they start questioning your business decisions.. Why did you pay this much for a plumber.. This seems too expensive.. Etc.. Etc.. Etc.. You will have people micromanaging literally every single aspect of the venture. If the person with money is bringing his money to the person with expertise, then the person with expertise should be given level of freedom to perform

If you don't have trust developed amongst partners, then no point is doing joint ventures. 

Just my 2 cents..

In reading OP's post, he's not talking about a large scale investment project, he said "Hey BP, I am currently looking to partner on a small multifamily deal with a friend.....". That's TWO guys.

You're talking about investments where you need to do SEC filings. The type of investment you're thinking about is what Donald Trump used to engage in, where he's the general partner running everything, and there's limited partners put up the money, that has no say in anything. From what I heard, on some of the deals, limited partners lost big, but the Donald did OK for himself, even when the project goes into bankruptcy. Limited partners are just told to get lost.

So for these small deals, it's OK for you to say I'll do the work, you put up the money, but we're equal partners. As an equal partner, I have the right to see what's in the bank. I'm not, and do not plan to be, a limited partner told to get lost. And I'm not looking for a 3rd, 4th or the 50th person to engage in the deal. If you are, then you're in Donald Trump territory, and not for me.

Originally posted by @Chinmay J. :
Originally posted by @Alina Trigub:

@Kellen Driscoll As an alternative to giving your partner access to the bank account, you can give him access to the application where you're keeping "the books" for this project. Any app would allow to set up a Read Only access where your partner would only be allowed to view the data without the capability to change anything.

Best!

 This is a great idea.. I believe Quickbooks allows multiple people to access the portal. 

 That's fine so long as you don't keep TWO set of books, one set to show investors, which is a very common phenomenon. 

Maybe I missed it in this thread, but are you taking title in your own names or in the name of a corporate entity (i.e. an LLC or other corporate structure)? If title is held in an LLC, then the LLC should open the bank account and your LLC agreement with your partner should describe how all income is allocated and reported. With an LLC, you can both have access to the bank account and the LLC agreement will protect both of you by defining all of your rights and remedies up front, before anything blows up in your faces.

I'm not an advocate of paying attorneys more than you need to pay them, but everything I'm reading here suggests to me that you would be well-served by meeting with an attorney before you close the deal to develop a structure that will protect both of you. The best analogy is that it's always cheaper and easier to keep a canoe from going over the waterfall than it is to recover the canoe and its occupants once they're downstream.