Would love some insight/thoughts on how to structure a partnership:
1. Making an offer on a cash-flowing (~$550/mo.) duplex.
2. Structured in an LLC -- my holding company will own 2/3, our silent investor will own 1/3.
3. Silent investor will contribute 20% down payment + closing costs (~$40K). My 2/3 interest will not contribute up-front cash.
4. My 2/3 interest found deal, and will be performing all property management, accounting, etc.
5. Purchase Price: ~$185K.
I'm struggling how to reconcile what happens if we sell the property 2-3 years later. How do we ensure our investor gets his money back? So, for example, if we sell the property for $200K, with a remaining mortgage of $130K, the remaining left over after the sale is only $70K. If my investor gets 1/3 of that, he only gets ~$25K back on a $40K investment, even though we made an overall.
How do we protect his investment? Any thoughts or suggestions would be much appreciated.
Maybe refinance after a year and pay him out then you’d completely own the property.
@Scott Simmons write it into the Operating Agreement that all cash flow is divided 2:1 between you and the partner, but when you sell, profit splits are calculated after returning initial investment to the partner.
In your example, he would get his $40k plus 33% of the remaining profit [.3*($70k-40k)]= $9,900.
If you sell the property at a loss, both of you will have to figure out how/if he is made whole.
Paying an attorney to draft the Operating Agreement is well worth the piece of mind and is not something to be pulled off of Google.
Also,be careful with the silent partner label. Without him having an active role in decision making, it could be considered a security. If things go south, this fact could come up to bite you in court.
@Bill F. , thanks for the advice, particularly about the "silent partner" matter. Hadn't even thought about that. Our guy will have an active decision-making role, but will not participate in "day-to-day" activities.
@Bill F. , we made an offer on the property today. Listed at $194,900; we offered $175,000. Structured it just as you suggested. Thanks!