Partnering Multi-Family Rentals and Paying Your Partner
Real Estate Agent · Chester, NY · Member since 2020 · 34 posts · 9 votes
Hello All,
I know, I bet this question has been asked before, I searched and couldn't really find an answer though to my question...so here goes!
I'm looking to mainly purchase multi-family (even Single-Family) properties, and I don't have a huge amount of money, so I'm looking to partner up with someone who has money to invest. I bring the deal, they fund it, I manage the rehab/turn, we get tenants and money is made. I understand that part of the formula. What I'm not solid on are the strategies to paying a partner back and taking over the deal.
Can someone please explain some strategies that are available to fuel that plan?
Thank you in advance!
I would treat it no different than a large apartment syndication. I would find a way to come up with at least 10% of the equity needed for a deal so you are truly a partner with skin in the game. I would include in the operating agreement a simple preferred return (8%+-) paid to all partners, 70% of remaining cash-flow goes to the partners, 30% goes to you. After a sale or refinance all cash goes to pay all partners their capital, any remaining profit is also split 70/30. You can change the numbers, but that is a very common way to do it that most attorneys and sophisticated investors will be familiar with.
As far as "taking over the deal," that's a little more complicated. Many investors don't want to be taken out of the deal only for you to make more profits while you keep holding - it just doesn't seem like a partnership, more transactional. However, if you're upfront about it, and they can still make a good return, they might not care. You could offer that they are "out of the deal" or their share of the profits is significantly reduced after a certain negotiated return threshold, say a 20% IRR. Or you could simply buy them out at some point. Keep in mind proceeds for a refinance usually first flow to return capital. If you kick them out of the deal after only getting their capital back, they may not be too pleased with only getting cash-flow and no upside.
(Not legal or financial advice)
I enjoy this comment. I was considering bringing on multiple partners for smaller (500k or less) deals. Whether debt or equity partners, I think this strategy is an interesting and fun one.
Do you by chance have any clue about how many JV partners you can have, or the legality on how to "ask, without advertising?" That seems to be a major hurdle without hiring a PPM lawyer...
I'd suggest that you come up with a fair partnership of who's putting in what and who's collecting what on the back end. Many or most people bringing in the money think that since they're brining all the money, they're 100% owners and you're just an employee. And they'd be right to think this way, because most of them could do this without you but you can't do it without their money.
So you need to find the money partner who understands your value and has no interest in doing it on their own but sees the value in this partnership. And if you enter into any parnerships using an attorney to create the parnership, expect that the $$ person's attorney will see it as paragragh one above (that they're 100% owners and you're an employee). The $$ people can get spooked by attorneys, families and friends, so be prepapred for it. Otherwise keep trying until it works, good luck.
It's a good question that everyone starting goes through. When I started I was in the same position. How I structured it was that I found the deal (many times off market), negotiated the deal, oversaw all management and construction and manage the management. In doing this when you have little experience, the risk is obviously higher. I had a hypothesis but no real life experience so I gave 6% return on any money they invested into the deal and 50% of the cash flow. It was worth it to me since my investor procured all the financing (at great rates that I couldn't get). We have very clearly defined roles. If you are able to go with something simple in the beginning to get a few under your belt, you can change later. This same investor, after proving myself for years, would just loan me cash whenever I needed it since I had built the trust and we were already partners in other deals that we had built substantial equity in so he was really secured. This helped me build my own portfolio with zero partners but was only able to do so after taking care of my investors. I would start small and simple and go for value add off market deals that a savvy investor can't find on their own.
I would treat it no different than a large apartment syndication. I would find a way to come up with at least 10% of the equity needed for a deal so you are truly a partner with skin in the game. I would include in the operating agreement a simple preferred return (8%+-) paid to all partners, 70% of remaining cash-flow goes to the partners, 30% goes to you. After a sale or refinance all cash goes to pay all partners their capital, any remaining profit is also split 70/30. You can change the numbers, but that is a very common way to do it that most attorneys and sophisticated investors will be familiar with.
As far as "taking over the deal," that's a little more complicated. Many investors don't want to be taken out of the deal only for you to make more profits while you keep holding - it just doesn't seem like a partnership, more transactional. However, if you're upfront about it, and they can still make a good return, they might not care. You could offer that they are "out of the deal" or their share of the profits is significantly reduced after a certain negotiated return threshold, say a 20% IRR. Or you could simply buy them out at some point. Keep in mind proceeds for a refinance usually first flow to return capital. If you kick them out of the deal after only getting their capital back, they may not be too pleased with only getting cash-flow and no upside.
(Not legal or financial advice)
Usually through your network you could find someone to partner with. Hardest part would be find a partner if little to no money combined with little to no track record.
but make sure to clarify everything in writing.
I would definitely say it is up to the partner. I would consider what their needs are, what your needs are... are you willing to take less - like 30% share... are you dividing the equity up, the cashflow? Would you save the first years cashflow? Would you be able to raise any debt on your end?
I am in a similar situation and I am personally trying to invest in cheaper markets, join a partner, combine money, and possibly even raise debt, working with seller finance or flexible private lenders.
Best of luck,
Owen.
I would treat it no different than a large apartment syndication. I would find a way to come up with at least 10% of the equity needed for a deal so you are truly a partner with skin in the game. I would include in the operating agreement a simple preferred return (8%+-) paid to all partners, 70% of remaining cash-flow goes to the partners, 30% goes to you. After a sale or refinance all cash goes to pay all partners their capital, any remaining profit is also split 70/30. You can change the numbers, but that is a very common way to do it that most attorneys and sophisticated investors will be familiar with.
As far as "taking over the deal," that's a little more complicated. Many investors don't want to be taken out of the deal only for you to make more profits while you keep holding - it just doesn't seem like a partnership, more transactional. However, if you're upfront about it, and they can still make a good return, they might not care. You could offer that they are "out of the deal" or their share of the profits is significantly reduced after a certain negotiated return threshold, say a 20% IRR. Or you could simply buy them out at some point. Keep in mind proceeds for a refinance usually first flow to return capital. If you kick them out of the deal after only getting their capital back, they may not be too pleased with only getting cash-flow and no upside.
(Not legal or financial advice)
I enjoy this comment. I was considering bringing on multiple partners for smaller (500k or less) deals. Whether debt or equity partners, I think this strategy is an interesting and fun one.
Do you by chance have any clue about how many JV partners you can have, or the legality on how to "ask, without advertising?" That seems to be a major hurdle without hiring a PPM lawyer...
@Owen Thornton If you are going to raise money you are technically selling a security so regardless if you're serious about it you should speak to an attorney that specializes in syndications / securities. Research "Reg D 506(b) and Reg D 506(c)".
@Spencer Gray I will see, I was looking at some of the laws on that. I need to get a better idea if talking to friends and family counts as "raising." (Though it is, maybe it isn't legally... should do some due diligence there).
If the investor is truly passive, you may want to consider drawing up a syndication agreement or a promissory note. If you need a loan, you'll want to consider what a lender will require as well. They'll want someone with the networth and liquidity to be accountable for the project.
You can structure a deal however you want, it just depends on what other investors will accept. Your best bet is to talk to a real estate and/or syndication attorney to give you some clarity.