How To Structure A Partnership For Duplex Investment

Question

My former boss and I have discussed partnering on flips. He has extensive experience with hotels and renovations. I have run numbers for LTRs on a set of duplexes that seem to cash flow well. I'd like to bring him in to assist with the renovation expertise as well as access he has offered to his labor pool. I am looking for suggestions on how to structure a partnership (short term) that will benefit him but allow me to be dissolve our partnership after a couple years as he isn't interested in long term holds.

Asking price is $998,000

2 duplex units on 1 acre in good location.

It's been on the market for a while, so I believe we could offer slightly above $900,000 and be considered.
I would increase the rent after updating each unit. All are perfectly functional now, but could pull higher rent with replacing the flooring, and updating the kitchen.

My current financing setup for this deal would be $235,000 from the HELOC I already have secured. Primary residence is paid off.

Then the rents would cover that payment plus the mortgage with cash left over. I also have some cash reserves that I plan to dump into a contingency fund for each unit.

This deal looks really solid to me, but I have only been looking at rental properties as high as $600,000 in discussion with my lender. I'm assuming I won't have that high of purchasing power, and therefore I believe partnering with my former boss would provide the "backing" i would need.

My overall goal is to obtain these units and have them long term into my retirement for cash flow. I would like to be in the partnership for the least amount of time possible but want to be sure I can present this offer as worth his time, which is very valuable.
What would you do?

Thank you!

Ben Trageser · Answer

I would make sure that you have an ironclad partnership agreement if you go into this deal with your former boss. Make sure you have roles and responsibilities set up. You also want to think of what the exit strategy is for both parties. What is your former boss looking to get out it? If the exit strategy is that he sells his share to you, how are you going to finance this? If things go south, how would you both be able to walk away?

Brittney Yang · Answer

@Ben Trageser those are excellent points, thank you for the perspective!

Ashish Acharya · Answer

@Brittney Yang To structure a short-term partnership for your duplex investment, establish a joint venture or LLC with clear roles, responsibilities, and a timeline for dissolution. Allocate equity based on contributions: you provide the $235K HELOC and management, while your former boss contributes renovation expertise and labor. For example, you might agree to a 70/30 or 60/40 split, depending on his level of involvement. Include a buyout clause allowing you to transition to sole ownership after two years, based on a pre-determined valuation formula or market value.

Use an LLC to hold the property for liability protection and pass-through taxation, ensuring both partners benefit from depreciation to offset rental income. Capitalize renovation costs to increase the property’s basis and reduce future taxable gains. Profits during the partnership can be shared based on the agreed equity split, with income and expenses reported via K-1 forms. Make the offer appealing by highlighting the short-term ROI from his renovation expertise and potential profit-sharing during the partnership. Outline a clear exit strategy to meet your long-term goal of retaining the property for cash flow.

Work with a CPA to ensure tax efficiency, particularly around depreciation, capital gains, and partnership income. Consult a real estate attorney to draft a comprehensive agreement that includes clear terms for profit-sharing, buyout provisions, and dispute resolution, ensuring the partnership is mutually beneficial while minimizing risks.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Brittney Yang · Answer

I am sorry that I missed your response on this. Very thoughtful! I appreciate your time in providing an actionable answer. Thank you!

Matthew Drouin · Answer

@Brittney Yang first red flag is it doesn’t sound like he’s that interested in long term holds but the primary reason for partnership is expertise in renovation and secondary reason is balance sheet and income to help get financing.

Regarding reason one, I would offer to compensate him for his time in assisting you and have a very clear scope of what that responsibility is.  A deal this small wouldn’t make sense as a partnership unless the original intent was to scale and grow together assuming this deal works out.

In regard to the financing, if you can’t get it on your own without someone else’s balance sheet and income then it would be very difficult to untangle that partnership since he’d be a personal guarantor right along side you.  So even if you had a buy out agreement negotiated up front and execute that buy out agreement, the bank would still require him to be guarantor unless something drastic changed on your side financially.

The best scenario here would be to purchase and rehab the property using a hard money lender or bridge lender.  If you were able to increase the value of the property significantly after the rehab, then you could bring the deal to a community bank  to refinance and take the hard money lender out.

You keep all the equity and don’t have to file a partnership return for your annual tax return, which can be costly.  I pay about $2500 a year for each of my partnership returns with my CPA regardless of whether it’s a $1M deal or a $5M deal.

I would save the partnership conversation for if and when you are doing much bigger deals.

Chris K. · Answer

@Brittney Yang

For the actual legal document, get an attorney. But you have a few different options. As @Benjamin Aaker mentioned, a personal loan might be a better option. You could form an LLC and have the operating agreement that allows your boss to require you to purchase his membership interest (or allow you to purchase his) in a given time frame. But might be overkill for this deal size.Disclaimer: While I’m a licensed attorney, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Benjamin Aaker · Answer

If you are coming in with 235k, you probably would not need much more, if any, to make the purchase. If you need more to do the rehab, perhaps instead of partnering, you could get your former boss to do a personal loan.

Jaycee Greene · Answer

Hey @Brittney Yang, welcome to the BP Forum! Is your former boss putting in any of his money? Have you talked about GP/LP waterfall splits?

How To Structure A Partnership For Duplex Investment

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