Structuring multifamily partnerships

[Michael Fanelli]

Hi everyone! First time poster here. I'm Michael Fanelli, and licensed Realtor with @Mark Ainley at GC Realty. My wife and I are looking to purchase our first multifamily and are trying to figure out what's the best way to structure a partnership for a BRRRR house-hack. Debt partnership? Equity partnership? We feel comfortable we have enough to purchase with a FHA loan, but we're struggling to figure out how to finance the rehab. 203k was a thought, but I've tried to help clients with them and they're always a mess. Open to any recommendations and suggestions that have worked for you all.

Thanks!

[Michael Fanelli]

Quote from @Mohammed Rahman:

Hey @Michael Fanelli - I'm guess your wife and yourself are thinking about partnering with other people in order to attract their cash investment? Something I haven't personally done, but have had my other clients do is setup a waterfall structure. 

This is commonly used in larger REI firms, but you could apply to something similar depending on whether you still want to do it or go through the hard money route.

Effectively, you discuss with your outside partner what their target return is and ensure that they get paid out their portion + target return at the refinance/sale/close/etc. Any profits above their target return, is then provided to you at a higher % than the initial chunk of the profit. My explanation isn't sufficient, but did my best with grossly simple example below. 

Initial purchase price $100k. You + wife invest $20k, partner invests $80k and states she wants 10% return on her $80k. 

You sell/refinance the property for $150k. You + wife get your initial $20k back, partner gets $88k, and the remaining $42k is then split between outside partner and you but you get a large portion of it (for example 60%). Outside partner is happy since she wanted 10% return, and gets a little extra on top of it too. This is just one way to structure a deal, but is a good way to "sell" the deal to an outside partner that's bringing in the biggest chunk of capital to the table. 

Just an example, hope it helps. 

 This is exactly what I was just listening to on a BP podcast. My two brother-in-laws are out of state RE investors living in Peoria, and this is how we would structure a deal with them. Their initial investment plus the agreed upon return, and everything that's left over is split 60/40. Just trying to brainstorm options. Lot of people saying don't invest with friends or family.. I'm not quite sure which side of that I fall on just yet!