partnering with Family and Friends

4 Replies

A small group of friends and fam have been dancing with the idea of partnering up into a multi-family property deal together.  My wife and I are the most experienced of the bunch and it isnt much (just holding onto some low priced single-fam properties as rental income).  Everyone else never invested in real estate.

The arrangement we are hoping to have is one of equal footing where for example, if partner X put in 20% if the total cash then that partner receives 20% of all cash received.

My wife and I would not mind doing most of the heavy lifting for this potential partnership without receiving any additional benefit.  Also we are looking to invest out of state as our local market of SoCal would not have the returns we are after.

Im trying to get more details of how a partnership usually works in real estate so if someone can shed light on how their own partnerships operate that would be great!

also Im curious if it is possible to get a loan? I assume we'd setup a LLC but Im not sure how someone would get an investment loan as a freshly created LLC even if it has a large amount of funds in the bank.

Howdy Nathan - so I think the first thing to dive into is that LLC's and Partnerships are not the same thing. Probably best to sit down with an attorney and walk through your entity options. Most investors we work with form LLCs and the Operating Agreement is the most important document. Don't just print something you find online. It needs to clearly indicate who the 'signatory' is. Meaning, who is allowed to sign for the company...is it one person? Everyone? Like you mentioned it outlines how profits are distributed. Perhaps most importantly, it needs to define the members risks as well. If the property is not cash flowing...who is paying what? You won't be able to get a conforming Fannie/Freddie insured loan with the fresh llc, so you'll need to go the private/hard money route, or talk with a local credit union or 'portfolio' lender. These are institutions that look like normal banks, but they don't really follow the same underwriting requirements that depository or direct lenders follow since they are lending their own money out. ie in WA - Washington Federal, Timberland Bank etc. Hope that help!

Hi @Nathan Williams !  You're thinking through this with a very cool mindset:  mutual benefit.  That's a great footing to be on.

Partnerships can be structured in dozens of different way and there are surely benefits an detriments to all.  The biggest things to consider with forming and buying property with a partnership is being crystal clear on the front end and writing it all down.  Even among friends, or perhaps especially among friends, this is critical, but perhaps not the norm perhaps.

You'll want to be on the same page with regards to:

- What goals do you want to pursue with the properties?  Quick cash growth through selling, or cashflow?

- Who will do what?  Exactness is key.

- When there is additional capital needed, who will contribute and in what ways?

- When new people want to join, how is that treated?

- What kind of say does each person have?

It is possible to get a loan, but it will be a commercial loan as opposed to a residential mortgage (not fixed over a 15 or 30 year and based off the Wall Street Prime rate mostly).

Good luck in the planning and execution!

make sure everyone involved has similar risk tolerance and approach to real estate investing. And dont involve more people than needed.

My brother and I invest together 50/50.  Its working out so far. But I have been in groups where nothing ends up happening because the group was too big and had people that werent on the same page