Rental Property Investor · Long Beach, CA · Member since 2015 · 623 posts · 155 votes
Hi All,
I may have found the right apartment complex to buy but I have no idea how to structure the purchase, ownership, monthly cashflow and selling it. I will manage the entire purchase and the apartment itself (not as a PM, just overseeing it), my friend will be totally passive.
I don't have the $500k downpayment but my friend does. I can bring 10%-20% of the downpayment but not nearly $500k. How can I structure this? I want to be as fair as possible but I do need to make this worth my while.
I've heard some people say you only need a little skin in the game if you're managing everything (again not as a PM) and you can split some aspects 50/50. Others say you just take the percentage you contribute and 10% for managing it.
Entrepreneur and Linguist · Braddock, PA · Member since 2015 · 70 posts · 40 votes
11y
I would recommend you putting in as much as you can, and your friend cover the rest. You can each have different amounts in your respective capital accounts and that is perfectly okay. Then you might want to split the cash flow profit and tax benefits in proportion to how much each of you contributed.
Then when it comes time to sell the property, maybe split the net income either 50/50 or again in proportion to how much each contributed on the down payment. That can also be spelled out in the partnership agreement. Then in terms of the duties, make it explicit in the partnership agreement who does what, and specify who does anything that needs to get done that wasn't thought about and documented.
When it comes time to cash out, the amounts each of you have in your respective capital accounts is how much you get back (if the bookkeeping was done correctly).
Real Estate Consultant · Mobile, AL · Member since 2015 · 78 posts · 96 votes
11y
You have to do what you feel is right and what your partner agrees to. If I'm doing the deal and put in 20% equity then I only expect a 20% return. You can put in fees such as an acquisition fee, and even roll into the deal for a larger percentage. Acquisition fees can run from 1 to 5%. As you mentioned you can have a management fee. I would be careful with this if your going to have a property management company running the property, you can expense yourself into a negative cash flow situation. There's also rehab management fees and asset management fees.
I would ask an attorney before charging or trying to take any fees because blue sky laws in your state may preclude some or all of them.
Entrepreneur and Linguist · Braddock, PA · Member since 2015 · 70 posts · 40 votes
11y
[I am offering this perspective for its educational value, not as a legal or professional opinion. Standard disclaimers apply.]
From a legal entity perspective, I would say you could structure this with a well drafted partnership agreement. Actual partnerships are passe, but you could do an LLC that is structured as a partnership and files a partnership tax return at the end of the year. Since this is a pass through structure, the tax items will be reported on individual K-1 statements in proportion to how you divide it up.
In terms of the cash investment, each of you will have a "capital account" inside the partnership structure. This represents how much skin you have in
Entrepreneur and Linguist · Braddock, PA · Member since 2015 · 70 posts · 40 votes
11y
[sorry, the reply poster cut me off...]
...the game and how your profits will accumulate. Make sure your tax preparer understands how you do the splits so that each K-1 gets reported properly if it is not an even 50/50.
Rental Property Investor · Long Beach, CA · Member since 2015 · 623 posts · 155 votes
11y
@David Monroe and @J Scott Hamilton, thank you both. I was hoping that people would chime saying we should go in as 50/50 partners. He and I will have to talk about all of this but I understand that it would make most sense to split it per the amount we each contribute.
Thanks again and please contribute more if you have any thoughts.
Entrepreneur and Linguist · Braddock, PA · Member since 2015 · 70 posts · 40 votes
11y
I would recommend you putting in as much as you can, and your friend cover the rest. You can each have different amounts in your respective capital accounts and that is perfectly okay. Then you might want to split the cash flow profit and tax benefits in proportion to how much each of you contributed.
Then when it comes time to sell the property, maybe split the net income either 50/50 or again in proportion to how much each contributed on the down payment. That can also be spelled out in the partnership agreement. Then in terms of the duties, make it explicit in the partnership agreement who does what, and specify who does anything that needs to get done that wasn't thought about and documented.
When it comes time to cash out, the amounts each of you have in your respective capital accounts is how much you get back (if the bookkeeping was done correctly).
Rental Property Investor · Long Beach, CA · Member since 2015 · 623 posts · 155 votes
11y
Thanks @J Scott Hamilton. That is probably what I'm going to do. Now to figure out what to include in the presentation I send him and which property to offer. I have 2 I really like, if I only had more money to invest.