How to structure partnership? His money, my management.

Question

So say my friend from out of state wants to use his cash to invest in a property in my state. He wants me to find the deal and then manage the project. He’ll finance the project, let’s say 25% down with a conventional loan, and then we split the ownership. For this example let’s just say I get 10% ownership of all equity, cash flow, etc, and he gets 90%.

Legally speaking, what type of structuring should be in place? Is an LLC beneficial/necessary? For him to borrow and fund the investment and for me to manage it. What things should I make sure of when bringing this together? Will the bank require anything of me since I'd have ownership interest?

Hoping to open up the discussion and get answers to some of the questions im probably not even asking yet.

TIA!

Tim Delaney · Answer

@Ryan Newport I agree with Henry, you should definitely make this work, even if it is for very little equity to help you get your foot in the door.

That said, LLC is probably the best route. You would get better financing terms if you just purchased in your personal names, but I’m not sure you would be able to do anything other than a 50-50 split.

With an LLC you can set it up exactly to proportions of ownership you want and the operating agreement should spell out exactly what each person is responsible for.

Most banks would want to know who you are and look into your financial situation a little. They may also want to know what kind of real estate experience you have if you are going to be the one managing. However, since it would be a commercial loan they will ultimately be more interested in the cash flow of the deal.

Henry Clark · Answer

1.  No matter what advice you get, do this.  This is your chance to dive in, with only sweat equity in the game (make sure you have insurance and mitigate any personal liability).

2.  See my post   Self Storage- So you just died.  This will give you a lot more discussion points to consider.