Structuring a partnership buying long term rentals?

Question

Hello everyone! I am looking for multifamily deals in my area and I have enough for a downpayment on one that I found. This will be my first deal and it is all the cash I have if I buy it with a dscr loan. My thoughts were to partner with someone to split the down payment. I wanted to understand how to structure it and how to incentivize someone to partner with me. Would we split everything 50/50? Would we set up a LLC together or a JV? Any advice helps, thank you.

Brandon De La Pena · Answer

Wow, I am a financial advisor and never even realized how it would be considered a security sell. That makes sense, I will consult with an attorney. Thank you!

Evan Polaski · Answer

@Brandon De La Pena

Jason, being an attorney, is probably best to handle the ins and outs of the two options that you outline.

From a different level, do you want another active partner or passive partner?  This will also create some nuance in the structure, but the items below can really be used for either.

I always think of a "partnership" (whether truly a legal partnership, LLC, JV, but I am using it in a general sense) as having two distinct areas.  First is the money.  Who is putting up how much of the money and whatever the ownership for putting up money is, is divided up pro rata based on money invested.

The other side is the "work".  Finding a deal, underwriting, managing, signing loan docs, etc.  This has its own value in the deal.  Now, this can be all fee based or it can ownership based, or a combination of both.  Then you allocate responsibilities here, if your partner is actively involved too, and each role has its own fee and/or ownership rights.

Let's say the "work" is 30% of the deal and the money is 70%.  Then you say sourcing deal is 20%, managing is 20%, putting your credit behind the loan is 10%, etc.  These allocations are of the 30% for the work.  So effectively, you sourced the deal, so you get 20% of the 30% work side (or 6% of the overall deal).  If you are doing it all, then you get 30% of the deal, plus if you are putting up half of the money, you are getting 1/2 of the 70% that side too.  So in all, you have 65% of the deal and your partner have 35% for putting up half the money without doing any major work.

And now, we get into what is work, because if your partner is truly hands off, no say or decision making abilities, you are selling a security and now need a securities attorney involved.  The level of activity your partner needs to be able to do a JV is something you should talk to your attorney about.

Jason Marino · Answer

Hi Brandon,

You spoke about 2 of the most common ways to structure a partnership for real estate investment in your post. Generally, the LLC option is going to offer more control and structure over the partnership. The Operating Agreement will have the ability to handle many of the common issues that arise like internal disputes, control, ownership, and payments as well as some other issues that may be useful in case the partnership is terminated like non-disclosure and non-compete clauses. This entity could be used to control and own multiple real estate projects, and it would likely be helpful in providing some organization in a long-term partnership. A Joint Venture Agreement is usually less formal than an Operating Agreement, but it will address many of the same issues that I noted above. This is usually just a contractual agreement, and it is useful in single projects. I will say that it is not always easy to alter a single Joint Venture Agreement document to be broad enough to address all of the issues that may arise in a long-term partnership with multiple projects.