Partner Wants to be Exclusive, I Want An Open Relationship

Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes

Ok, so I’ve recently begun looking at taking on some partners so that I will be able to do more deals. Mainly buy and hold, but the option of flips could arise in the future. I now have two people that are willing to put up some money. Out of state money partners The plan was, everybody gets a piece of the action, with the bank still financing a chunk. Profits after expenses are split according to who puts in what percentage. Seemed fairly standard. Now, one of the partners wants to do the first deal with just me. Perhaps he’s thinking a bigger profit? Perhaps he has some trust issues? Well, the more I personally spend on the first deal, the less cash I have to go around. So, if push comes to shove, do I go ahead and do a 50/50 deal with him? What if that alienates the other partner, who wants in on a deal ASAP?

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Brie SchmidtBusiness Member

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Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes

@Anthony Wick - I have 3 partners but I structured it 1:1 with each of them and I would not have done it any differently. It allows me to manage each relationship differently and autonomous of each other. So if one partner wants to sell it would be just for the properties we own the two of us and would have no effect on the others.

Buy and hold is like a marriage, and you are in it for the long haul. If one relationship goes south it is contained to just that partnership.

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Dan Barli
Attorney · Clifton, NJ · Member since 2015 · 1k+ posts · 328 votes
8y
That's a tough dilemma @Anthony Wick. I would recommend you have an honest conversation with the first partner and remind him that you had always talked about other partners involved in the deal. It wouldn't be an honest move for you to partner solely with him and cut the others out, just as he should understand you wouldn't do that to him. I think it would show your integrity and commitment.
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Brie SchmidtBusiness Member
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Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
8y
@Anthony Wick - I have 3 partners but I structured it 1:1 with each of them and I would not have done it any differently. It allows me to manage each relationship differently and autonomous of each other. So if one partner wants to sell it would be just for the properties we own the two of us and would have no effect on the others.
Buy and hold is like a marriage, and you are in it for the long haul. If one relationship goes south it is contained to just that partnership.
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Dustin Beam
Kansas City, MO · Member since 2015 · 609 posts · 321 votes
8y
Originally posted by @Anthony Wick:
Ok, so I’ve recently begun looking at taking on some partners so that I will be able to do more deals. Mainly buy and hold, but the option of flips could arise in the future.
I now have two people that are willing to put up some money. Out of state money partners The plan was, everybody gets a piece of the action, with the bank still financing a chunk. Profits after expenses are split according to who puts in what percentage. Seemed fairly standard.
Now, one of the partners wants to do the first deal with just me. Perhaps he’s thinking a bigger profit? Perhaps he has some trust issues?
Well, the more I personally spend on the first deal, the less cash I have to go around. So, if push comes to shove, do I go ahead and do a 50/50 deal with him? What if that alienates the other partner, who wants in on a deal ASAP?
I'm not too fond of someone trying to strong arm me, so my first impulse is to tell the guy that you're happy to do business with him under the terms you already discussed or he can move on if he prefers it that way. I've never partnered BTW, so this is just general relationship thoughts.
What are your reasons for multiple partners? I know you said you'd have less cash to go around, but if the splits are based on invested amount, will it matter? I see where you could get some diversification by having a smaller slice of many more pies than 1/2 of one pie. Is there another reason?
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Anthony Wick
OP
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
8y
@Dan Barli @Brie Schmidt @Dustin Beam
Thanks for the replies so far. You've all made very good points.
Partnering is new to me as well. I've purchased a duplex and SFH so far this year (starting anew in real estate once again after divorce from 5 years ago), so my funds are sort of limited. The duplex market is tough around here so I wanted to take on partners to scale up to 4-8 plexes. I knew I needed at least one partner, and better with two to afford a deal. I'm not just finding and managing the deal, I am putting in equal amount of money. I just get a little juice off the top for finding and managing before the profits are split. Not much different than hiring a property manager.
Since no deals have been done with any partners thus far, both partners are really in the same in the pecking order. What I don't want to have happen is, on the first deal, one of them gets snubbed and doesn't want to maintain a real estate relationship. Neither person is in real estate, but both have money to invest (but no time).
For the first deal at least, I want to offer equal parts to both investors. Then, my plan is to find more partners. And when a deal is found again, there could be a pecking order to ask if they want a part of the next deal. Eventually, I could have a small/medium list of money partners, and I could get into a deal with $0 out of my pocket? That's getting waaaaayyyyy ahead of myself though.
I'm working on one deal right now, which I can afford on my own, but would eat into my funds quite a bit. My gut is telling me offer a piece of the action to both, while explaining if they do not want a part of it, I will hopefully be in touch soon with another deal. Important to note that I do not have any deals under contract right now.
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Anthony Wick
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Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
8y
Also, since I am new to partnering up on deals, any and all advice/templates would be extremely welcome. I am meeting with my banker on Friday to talk about details. I do not have an LLC set up, but that appears to be a top priority as well. Just myself in the LLC, as I want to be free to make deals with whatever partners I find in the future and not open up an LLC for every partner/deal that I find. But I could learn and realize that plan isn't the best way either.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
multiple partners In one deal and the partners don't know each other is running up on a securities offering or deal you may want to tread lightly there.
do what @Brie Schmidt does compartmentalize them one investor one deal.. no pooling pooling of investors into one deal is a BAD idea unless you have a PPM structure and adhere to the securities rules.. you take on a ton of risk doing that. and way to much for just little vanilla rentals.
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Zach Bollman
Attorney · United Kingdom · Member since 2017 · 41 posts · 16 votes
8y
If you're doing buy and hold with multiple partners, you'll want to make sure that you have a business structure that allows for the resolution of disputes and general management of the investment. An example would be to utilize a limited partnership to restrict the control that the financiers (limited partners) have. The last thing you want is to get four years in and have your relationship with one partner go south in a deal where you and the other partner don't want out. Establishing an investment vehicle can hedge against this and set out an enforceable legal structure to govern the investment and its management.
Zach
This post is intended to convey general information only and not to provide legal advice or opinions. The contents of this post should not be relied upon for legal or tax advice in any particular circumstance or fact situation. The contents of this post do not establish an attorney-client relationship.
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Anthony Wick
OP
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
8y
@Jay Hinrichs Thank you so much for replying. Your posts always contain such great information and advice. I did not mention, but I am meeting with my banker this week, and I will also be meeting with an Attorney so that I do comply with any laws and also form a good business model. If I read your post correctly, it's legal to use more than one money partner on a deal, but you have to have your legal paperwork in order to do so. Yes? I have done numerous deals over the years, but I also consider myself the "new old guy", especially when it comes to certain topics and ventures.
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Anthony Wick
OP
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
8y
@Zach Bollman Thank you for the advice. I definitely know that I don't know enough right now. Since I do not have any deals on the table right now, and no legal paperwork completed, I am doing my due diligence asap. What I do have is two partners with verbal agreements to partner with me on buy and hold real estate. And the initial conversations have been about forming legal entities and legal documents, to include exit strategies and agreements with each partner. For example, I mentioned I wanted a 5 year commitment on buy and hold, but also contingencies should a partner "need" to get out of the deal prior to that. No hand shake deals here!
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
8y
A money partner wanting to be the only partner is not (1) strong-arming or (2) cutting others out as some people have mentioned. Partnerships add a lot of complexity to non-syndicated deals and the fewer the partners the better (per deal) for some investors. Nobody should feel snubbed if you have decent deal flow.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
Originally posted by @Anthony Wick:
@Jay Hinrichs Thank you so much for replying. Your posts always contain such great information and advice. I did not mention, but I am meeting with my banker this week, and I will also be meeting with an Attorney so that I do comply with any laws and also form a good business model. If I read your post correctly, it's legal to use more than one money partner on a deal, but you have to have your legal paperwork in order to do so. Yes? I have done numerous deals over the years, but I also consider myself the "new old guy", especially when it comes to certain topics and ventures.
I am not big on over thinking this stuff.. and or paying way more money than you need to for entity set ups..
if your talking about SFR type rentals.. those are pretty straight forward.. And an LLC with you and the other investor as either members or managing members is all you might need.. go ahead and start a separate LLC for each investor which separate quick books and checking account .. One investor and you this should give you a safe harbor for not soliciting or setting up a security..
Inside the LLC agreement you have your operating agreement. this will spell out the business deal that you two cut.. as well as what was mentioned above which is basically a buy sell agreement.. For me personally if its my idea and the investors money I give them unilateral control.. as I never want an investor to feel that they cannot exit for any reason.. but that's me personally and if I am doing a good job then they will not want to leave.. but it puts the money at ease you have to honor the money.. deals are easy money its tough.. I know most think the opposite but not me I can roll into any market and find deals.. but finding Quality money partners is where its at if your going to scale.. or want to scale.
Then if you don't want to be a syndicator ( like me I don't care to be because of all the work involved and massive liability) its one investor one LLC.. and we are off and running.. Also since your investor is a member of the LLC they can be on the checking account and watch the money in real time this is a critical aspect of my companies.. and I don't have to make up reports etc.. they watch the business in real time … compared to if you have multiple investors and they are relying on your in house accounting and they are not on the checking account ( this mainly from the investors side of the table this is were things go sideways for investors.) no real access to the ACTUAL checking account only reports made up by the sponsor..
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Caleb Heimsoth
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
8y
@Anthony Wick I would either not partner with the one person or I would keep it separate like mentioned above. I hope you know what you’re doing before you take investor money.
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Sean Cole
Investor · Cincinnati, OH · Member since 2012 · 506 posts · 331 votes
8y
Originally posted by @Anthony Wick:
Ok, so I’ve recently begun looking at taking on some partners so that I will be able to do more deals. Mainly buy and hold, but the option of flips could arise in the future.
I now have two people that are willing to put up some money. Out of state money partners The plan was, everybody gets a piece of the action, with the bank still financing a chunk. Profits after expenses are split according to who puts in what percentage. Seemed fairly standard.
Now, one of the partners wants to do the first deal with just me. Perhaps he’s thinking a bigger profit? Perhaps he has some trust issues?
Well, the more I personally spend on the first deal, the less cash I have to go around. So, if push comes to shove, do I go ahead and do a 50/50 deal with him? What if that alienates the other partner, who wants in on a deal ASAP?
Why not have the investor who wants to be exclusive put up the amount that you'd have gotten from both other investors? You're still maintaining your 1/3 share (or whatever it is) that you were planning on and you're not putting any more of your capital in?
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Sunny Shakhawala
Parsippany, NJ · Member since 2016 · 64 posts · 49 votes
8y
@Anthony Wick The beautiful thing abt real estate is you get to decide how you want to do it. If you ask me, i wouldnt marry someone i just want to date. If that means the relationship ends, so be it.
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Anthony Wick
OP
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
8y
Heading out to view a place right now, and meeting with banker tomorrow. I reckon I better make some decisions, and fast. Luckily, I have several options. And all of them mean more real estate deals and more wealth for me. Then again, I do have a really good W2 job, so I'm really not feeling the pressure.
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Joe SplitrockPro Member
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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
8y
@Anthony Wick many people prefer a two way over a three way deal. Every added partner adds complexity to the dynamic. It is easier to get two people to agree than three, easier to get three to agree than four, etc. Personally, I would do the 50/50 and then find another deal to do 50/50 with the other partner.
Personally I avoid partners. If you are investing in smaller properties, it shouldn't be necessary. I would rather own 100% of one fourplex than 50% of two fourplex. Math works out the same for you, but the difference is half as many doors and no partners to deal with.
The two places where partners can add value:
1. Larger deals where you need the money. If it is a smaller deal, options like hard money lenders are better in my opinion because you keep ownership.
2. If they bring experience to the deal. If the investor can help mentor you or brings some value beyond just money, then it could help you long term.
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Anthony Wick
OP
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
8y
@Joe Splitrock The ability to do more deals also diversifies my investments, and more doors means when a vacancy occurs it isn't as harsh on the bottom line. Not to mention, not all deals are the same, in either cash flow or equity. I actually didn't seek out investors. I just talk about what I'm up to, and they both came to me and asked if they could get in on a deal. I'll give credit to @Brandon Turner and the BP podcasts for that!!
And, the smaller deals seem to be harder and harder to come by, so I figured maybe a couple partners and a larger deal could happen. I've missed out on my last 5-6 smaller deals. Outbid on several, and the numbers were just not up to par on a few more. Maybe a 6-8 plex, or something like that, and the numbers could be better is what I was thinking. So far, the partners value is money, and a certain level of trust, as I have known both people a long time.
But, nobody here is wrong. A dual partnership would be easier than a threesome. Every person you add to the mix and there's a chance of jealousy and problems. It's not a bad position to be in. Just gotta think things through and make sure it's all good from a legal standpoint.
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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
8y
@Anthony Wick more doors doesn't reduce vacancy. Twice as many doors will result in twice as much vacancy over time. For example if you own two 4-plex with partners. Over those 8 units, maybe you have two vacancies a year. Compare that to owning one 4-plex by yourself, you will have one vacancy per year. Same vacancy either way. Your profit works out about the same either way, so the difference with partners is you have twice as many tenants to deal with plus partners to deal with.
It sounds to me like you are driving more value than your partners, by finding the deals. I would suggest taking more than 50/50 split. Just because you put half the money in, doesn't mean you can't take 60% of the deal or more.
I just wanted to share a different perspective. Good luck.
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Anthony Wick
OP
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
8y
@Joe Splitrock I can't remember if I've said this before, but my plan is to take 10% off the top of rents, like a Property Manager would. Sure, it doesn't increase my equity share on the back end, and I am actually doing the work for the 10%, but it is a higher percentage "profit" than my partners. But I definitely like what you're saying!
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Brett Goldsmith
Investor · Los Angeles, CA · Member since 2012 · 1k+ posts · 500 votes
8y
1 on 1 is nice especially if you're doing a long term deal with someone you are not extremely close with. The more people involved, the more personalities and opinions to deal with. Since you mentioned you'll still be getting financing this means you will have more borrowers and people on title then just yourself which means you will need their full cooperation at all times to complete actions smoothly.
If I'm doing business with people who are not in my inner circle I'd be looking to see if it's possible to structure the transaction, entity, in a way that keeps me in full control of the property while protecting the others financial interests.
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Shaun Peterson
Investor · Oklahoma City, OK · Member since 2017 · 23 posts · 7 votes
8y
@Anthony Wick Generally I say 50/50 is usually ideal, unless it’s like a husband and wife situation, or each person has offsetting skills and roles are clearly divided. Otherwise it’s kind of a “too many cooks in the kitchen” situation and can be a cluster to deal with. In the case of the other partners, I say more disclosure is better than less. That’s just my two cents.
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Shaun Peterson
Investor · Oklahoma City, OK · Member since 2017 · 23 posts · 7 votes
8y
@Zach Bollman Have you ever run into issues with bank financing on LP’s? I’ve heard the structure can be problematic at times for obtaining it. I’ve worked on the bank side and they’ve been discouraged most of the times, but not officially.
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John Woodrich
Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
8y
Originally posted by :

It sounds to me like you are driving more value than your partners, by finding the deals. I would suggest taking more than 50/50 split. Just because you put half the money in, doesn't mean you can't take 60% of the deal or more.
Currently he has no deals.... He just has investors....
His current goal seems to be to get in with many investors into the largest property possible, put in his share, and get a 10% management fee. Under this structure he makes a lot more money if he gets 50 investors to purchase a 30 plex than a 1-1 deal where they purchase a duplex... Higher management fee with higher gross rents... His funds seem limited which is why he is confused about getting into a smaller deal.
I would recommend the OP search for PM clients to build experience, gain more investor contacts, and hopefully close a deal that he can participate in.
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Mark Sewell
Investor · Houston, TX · Member since 2017 · 1k+ posts · 871 votes
8y
Originally posted by @Brie Schmidt:

@Anthony Wick - I have 3 partners but I structured it 1:1 with each of them and I would not have done it any differently. It allows me to manage each relationship differently and autonomous of each other. So if one partner wants to sell it would be just for the properties we own the two of us and would have no effect on the others.
Buy and hold is like a marriage, and you are in it for the long haul. If one relationship goes south it is contained to just that partnership.
To me this makes sense. It is a risk management tool, and we all need those.
You could even structure it so that the money partner (private lender) gets first lien on the property, and here again, you would want to have one partner for one lien (maybe not required but seems easier). This is a different structure, I realize, it is a debt investment and not an equity investment, but for some potential partners, that might be a preferable arrangement. They know what return they are getting and their investment is secured.
It also keeps you well clear of any kind of securities offering, as Jay H wisely pointed out.
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Ian WalshBusiness Member
Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
8y
Does everyone know everyone else in the mix? Have a conference call to iron it out?
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