Thoughts about my partnership arrangement

Ehab Shoukry · 2015-11-11T07:24:02-08:00

Hi all -I'm sure there are all sorts of partnership arrangement options but wanted to get your thoughts on this one. I have a friend who lives in another state that wants to partner on multifamily deals. He is going to put up the money and I am going to find the deals.We would be 50/50 partners and the arrangement would be the following:1. I would find the deals and he would put up the financing for the 20% downpayment.2. The monthly profit from rental income would be split 50/50 whereby I would use my 50% portion of the profit to pay him back my half of the downpayment.3. If I chose to manage the properties I would get a management fee for doing that work.4. Once I've paid back my 50% portion of the inital downpayment, I would actually start getting paid on the investment.To put it in real numbers, if we bought a $100k property my partner would put up $20k downpayment to buy the property. If the property makes $10k a year profit, I would pay back my partner my half of the profit ($5k) until I pay him back $10k which is half the downpayment. At that point, we are both equally invested in the property. Essentially in this scenario, it would take me two years before I actually got paid on the property. I'm interested in what you thought about this arrangement and if others have done things differently.Thanks,Ehab

Carl C.

Investor · New York City, NY · Member since 2014 · 289 posts · 374 votes

10y

The only problem I see is that you don't get any value for finding the deal. I would want something a little better for my efforts.

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Percy N.

Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 904 votes

10y

@Ehab Shoukry, are you planning to purchase turnkey properties?

What if there is rehab required? Who would manage that?

What if there are longer than envisioned vacancies?

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Percy N.

Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 904 votes

10y

@Carl C., in exchange for finding the deal, it he is getting to defer this contribution of half the down payment. Depending on how great a deal that is, it may be worth it.

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Ehab Shoukry

OP

Investor · Houston, TX · Member since 2014 · 79 posts · 118 votes

10y

@Percy N. if rehab is required my partner would put up the money for that. I would have to pay back 50% of that just like the downpayment. I would manage the rehab. Vacancies are a risk but our arrangement would still be the same--it would just take me longer to pay back my 50% portion because the cash flow will be lower.

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Jeff HamelPro Member

Investor/Firefighter · Milton, WA · Member since 2014 · 45 posts · 20 votes

10y

I agree with Carl, you should get something for your efforts. If you were to wholesale the deal you could get $10K today and not have to wait 2 years. Do it twice and buy your own.

Also, if you need a capital call for repairs, maintenance, etc. who's money is coming in? Your partner or both of you? Then how long before you see any benefit.

Just my thoughts from the outside.

Who has the experience? Who is going to be the asset manager? Who has the liability if anything goes wrong? Are you both signing on the loan?

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Ehab Shoukry

OP

Investor · Houston, TX · Member since 2014 · 79 posts · 118 votes

10y

@Jeff Hamel we would both be signing the loan since we are buying in our LLCs name. Since my partner is remote, I will be handling the asset management. Essentially he is just a money partner since I have the investing experience in my area.

I'm interested in what partnership arrangement would be more fair if the one I have doesn't seem to be? I didn't think it would be fair to have him pay all the money and we split the profits 50/50 without me contributing capital as well. I guess one spin on this could be we both be 50/50 partners with my partner providing the capital and we get paid equally but when we sell the building, he would recover his initial investment and we split the rest.

Again...I didn't think that would be fair to him though.

Thoughts on a different partner arrangement?

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Patrick Noel

Hollywood, FL · Member since 2015 · 42 posts · 13 votes

10y

If you find a great deal, you can assign yourself a one-time acquisition fee for finding and putting together the deal together, usually 1-3% of the final price. In a partnership, you also need to address how expenses will be handled in the event the cash flow from the property is not sufficient to cover it...will that amount also be split 50/50?

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Wade Sikkink

Real Estate Investor · Lincoln, NE · Member since 2013 · 584 posts · 353 votes

10y

I think the deal you have outlined is fair. I disagree with some who suggest that you are not being compensated for your work in finding and managing the property. You are getting 50% of the profit. That seems to me to be adequate compensation.

Don't get greedy. If you don't have enough money to invest on your own then without your partner there would be no investing, so take the 50% you guys have agreed to and get to work.

Good luck.

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Joel OwensBusiness Member

Moderator

Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

10y

It depends on what other opportunities you have for your time.

Also think about what other opportunities you might MISS being a glorified property manager.

That 10k profit might never materialize due to unforseen capex and tenant issues. You can plan for costs but even then things can surprise you.

If you could sell multiple properties in the time it takes to get there for 10k it might not be as great as you think. Some people focus on the number. I focus on the time and effort needed to get to the number. I would much rather take 400k in a year then 1,000,000 in ten years. The longer a span of time the more things can change.

These days any investment cannot be a job. If it is then it's a no go for me. I have a job I enjoy very much which is transacting commercial real estate and it pays me on average 6 figures at a time.

If your partner has very deep pockets and you can scale this then it might be worth your time. If it's a one off type deal and your partner has limited reserves it could be a recipe for disaster. Spell out with an attorney how each party can get out of the agreement if a default occurs. Everyone is happy in the beginning with the possibilities but do not want to cover what happens if we lose it all situations. Nobody wants to talk about it and people hope it doesn't happen but still needs to be addressed. People need to go in with both eyes open to the good and bad of a potential partnership with a potential property or properties.

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Ronald PerichPro Member

Investor · Granite City, IL · Member since 2014 · 658 posts · 301 votes

10y

You might want to look up preferred equity partnerships. Under this scenario, the partner gets all of their equity back, with interest, before you receive any proceeds from the income. After that, they get a smaller piece of cash flow from that point forward. And cash flow could include the sale of the property. Not sure if this would be beneficial or not, but it does help the partner preserve their equity. And if you manage the asset well, you get a bigger slice of the final disposition.

In a way, your scenario is similar to preferred equity, but they aren't getting any interest and they'll receive a larger portion of the cash flow than is typically seen.

But if you are comfortable with it, go for it. But listen to @Joel Owens' advice... spell everything out in a contract or LLC agreement. You need to consider all of the ways this thing could go south and also have your "break up" papers done before you enter into anything.

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Ehab Shoukry

OP

Investor · Houston, TX · Member since 2014 · 79 posts · 118 votes

10y

@Joel Owens @Ronald Perich that both sounds like good advice. Essentially my partner is giving me an interest free loan to pay my 50% portion of the initial down payment. I would be paying him back through our profit. I also would not necessarily have to manage the properties because the option to use a property management company is always there.

We do have plans for bigger and better things. We are looking at two multi family deals so I believe the returns will be worth it over time.

Thanks.

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Kathy Stewart

Rental Property Investor · Dallas, TX · Member since 2015 · 243 posts · 70 votes

10y

Great plan- the best is what you and partner(s) determine as mutually agreeable. I also work with out of state investors, and seek the win-win scenario for all, so many variances/options.

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Ehab Shoukry

OP

Investor · Houston, TX · Member since 2014 · 79 posts · 118 votes

10y

@Kathy Stewart Thanks Kathy. I was really trying to understand what others have done and if this seems to be in line with other types of partnership deals. I am definitely thinking big picture so need an arrangement that will be win-win for both in the long run. Thanks.

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Chad U.

Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes

10y

In relation to any JV arrangement pertaining to rental properties, there are typically 4 main areas of contribution to the deal (4-M model):

Investment Capital (Money)
Mortgage Qualification (Mortgage)
Day to Day oversight (Management)
Expertise (Mastery)

Each category could be given its own weight, but generally are given an equal 25% weighting. So in your case, I'd think it would be fair to propose to your partner that you are providing at least 50% of the value in the deal and not necessary to pay him back the DP out of your share in profits. In fact, if you are both qualifying for the mortgage, you could argue that you are entitled to 62.5% of the deal, but that could be construed as being greedy.

So taking 50% of both cashflow and equity would be reasonable. Of course, in your exit strategy, it should be spelled out that he receives 100% of his capital contribution before any equity disbursements.

2 Reply

Ehab Shoukry

OP

Investor · Houston, TX · Member since 2014 · 79 posts · 118 votes

10y

@Chad U. I really like the idea of paying back my partner's investment if/when we sell the property. That way it allows me to start receiving income right away and move faster toward replacing my W2 income.

My partner and I both agree that the goal is to get my income replaced through REI so I can focus full-time on this and start making both of us even more money.

Thanks!

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Jeff HamelPro Member

Investor/Firefighter · Milton, WA · Member since 2014 · 45 posts · 20 votes

10y

@Ehab Shoukry

after reading some of the other posts I want to clarify my thoughts. Partners come together because of strengths. some have time, some have money, some knowledge, etc. if you had it all you wouldn't necessarily need a partner. I agree with 50/50 partnerships, as we do them on our flips most of the time. Our partner puts up all the money, we find the deals and manage the project. When we sell, we split the profit. all of the capital used is an expense and therefore accounted for prior to profit. Our partners have capital but not as much time or RE knowledge, that is where we come in. Some have mentioned without the capital you can't do the deal. True, but without a deal the capital will not have a place to work either( (the bank is not much of an option). Hence a partnership. I know of other investors who hold rental properties with partners. The partner purchases the property all cash, the investor manages, rehabs, etc. (whatever it needs) and they split the cash flow 50/50. There is no debt service so the return is much better than the money in the bank or CD.

In your partnership structure, the item I would not agree with (In my opinion) is the fact you have to pay back 1/2 of the down payment. in your scenario if that takes 2 years, if all goes right, I would not do it. As someone else pointed out too much risk for something to go wrong. Again in your scenario, $100K property with a $20K down payment and a $10k per year profit, your partner is making 50% cash on cash return + appreciation, (his $5k and your $5k) annually. You will be making nothing, + appreciation if all goes well. Same the next year, if all goes well. That doesn't seem like much of a partnership to me. 2 years is a long time to wait for any return while doing all the work. If you think of this as a business, how long could your business survive while doing all deals like this? How will you expand doing deals like this? if you are always working/managing and not receiving any income how will you survive for 2 years before having any cash coming in?

What other strength is your partner bringing to the deal? Is hard money cheaper?

If you didn't have to pay back 1/2 of the down payment (paid back in the end prior to profit) and split cash flow 50/50 along the way, this might work.

My concern is you need something for you time and effort or you won't be liking this business much. all work and no pay for 2 years doesn't look like much of a deal. I hope I explained a bit better for you.

2 Reply

Account Closed

Lender · Dallas, TX · Member since 2015 · 283 posts · 128 votes

10y

I would recommend the following:

1. Give your partner a preferred return on his investment. ie say 10% on his 20K.

2. After that split all the cash flow 50/50.

3. Lastly when you sell the property, give him back his 20K and then split the profits 50/50

Why. The plan you outline above is either a buy-in partnership in which case you do not really have 50/50 until the buy-in is complete and a lot can go wrong before that happens - OR - Its a loan from your partner to you to in which case a lot can go wrong as well. Lastly, there are some significant tax issues here and you really need to talk this over with your accountant and attorney. (at risk rules) Remember that your mortgage loan is most likely going to be "joint and several" meaning that both of you will be 100% on the hook not 50/50. That has the potential for all kinds of problems when only one party has actual cash in the game.

I like partnerships where that things are set going in so that when rainy days happen everyone know what's at play. Open ended partnerships always end up different from the original plan. Not to say that that's always bad but rather that when things are good, no one reads the documents, when things are bad, Article 12, paragraph 3, section 4.1 says......

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Mike H.

Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes

10y

I'm not sure I understand the hesitation from some of the posters.

This is a great deal for you. Would you rather have a one time fee of 10k
or 50% of a real estate deal? Its a no brainer. You mentioned MF deals so I'm not sure what kind of price points we're talking about.

But lets say its a 350k property that you buy for 300k. You put up zero money and have zero risk. The other partner puts up 20% or 60k. And lets say it makes 12k a year and it takes you 5 years to pay that 30k back.

That still means in 5 years you own half of a 350k building that will make you 6k a year every year going forward. And maybe in 15 years, that building is worth 450k and your loan amount is now paid down from 240k to 160k. You now have half of that 290k equity stake. Thats 145k!

So people here think its better to get 10k up front as opposed to half the deal?

Its a no brainer. This is a win win for both partners. One partner has the money. He doesn't want to move and he wants someone he can trust to find the deals and partner with them. You could say the same for him actually. Why should he give up half the property for finding the deal? He's providing all the money.

To me, this is the ideal scenario of a win win for two people. And a partnership helps both of you build more wealth than you could otherwise do individually.

You couldn't write up a better scenario for a partnership.

If I were you, I'd take this and run......

You have ZERO risk other than losing some of your time. I don't know many real estate investors out there that can say that......

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Ehab Shoukry

OP

Investor · Houston, TX · Member since 2014 · 79 posts · 118 votes

10y

It's interesting to hear all the different points of view. I did go back and talk to my partner and we modified the payout structure so I would get half of my distribution monthly and the other half would pay back my partner. This will help me to build my passive income so I can go full time one day. Thanks.

1 Reply

Wesley C.

Investor · Knoxville, TN · Member since 2012 · 96 posts · 33 votes

10y

First of all, I love this deal for you. One other consideration that I didn't see addressed in the other responses is refinancing. Many of us like to buy cheap, rehab, rent,refinance and then use equity to buy again (BRRRRRRR or something like that). If your partner has deep pockets, this won't be necessary. If he has a limited amount he wants to invest, you might want to utilize this strategy and work these numbers into your formula so you can achieve your 10% faster and so that your partnership will have more capital to grow faster/bigger. I might add, if you use this strategy your equity checks at closing with the refi will be directly proportional to your abilities as the "finder/buyer" of properties. In this case, you might want build in a prorated sliding scale commission for how much equity you are able to extract from each refinance. I have no idea how to structure that and I'm sure there are lots of holes in my logic, but just food for thought.

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Ehab Shoukry

OP

Investor · Houston, TX · Member since 2014 · 79 posts · 118 votes

10y

Thanks for all the continued great feedback. I built out an excel spreadsheet to really help me understand what my cash return would be and how quickly would I pay back my 50% portion to my partner. One aspect that does sweeten the deal is that I would be collecting property management fees as part of the deal. That means that whenever I find and sign up a new tenant, I get the first month's rent as a commission or in this case part of my owner distribution.

So on a vacant 5 plex that we are purchasing where each unit rents for $900 a month, I would get a $4,500 commission once I fill all the vacancies. Additionally I would get 7% a month for property management.

Also originally our arrangement was that my 50% portion of net income would go back to my partner to pay back my half of the initial investment but we renegotiated and I'm going to keep half of my portion and pay half back to him.

So between the property management fees and receiving half of my 50% portion of the profits, I have the ability to get a good income pretty quickly. After two years using this model, I would have payed back my portion of the initial investment and I'll be collecting my full half of the profit PLUS the property management fees.

Of course, once our business grows much bigger I will gladly give up the property management fees to a real property management company but at least we would have been accounting for that the whole time.

Win-Win.

Ehab

0 Reply

Jeff Greenberg

Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes

10y

There are couple of points that I would like to comment on.

1. What is the value that you are getting for finding the deal other than an interest free loan.

2. You are local so I assume that you are doing most if not all of the due diligence. Who is dealing with the closing, insurance, utilities, legal, and other aspects of the closing. If it is you, how are you getting compensated for it?

3, You renegotiated the terms. Does that mean you only have to pay back a 4th of the down. Or does this mean you get to take twice as long to pay back you 50%.

4. 20% down is sweet if you can get it, but is not always there. What about other closing costs: Legal expenses, title, property inspection, loan origination, third party inspections and appraisals. Rehab/capex expenses.

5. It would be good that you can get the fees as a PM, but you are getting paid to do a job, This has nothing to do with investing.

6. Let's talk about the loan. Don't kid yourself you and your partner are signing on the loan as you personally, not as a member of an LLC. More than likely you will start out with a recourse loan. Now this is a reason for your partner to get a potential bigger piece of the pie. All of his assets are being put at risk if you default. I am assuming that he has more assets at risk.

I agree with @Joel Owens you need to make it very clear the role of each player and the different exit choices.

1 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

10y

@Ehab Shoukry I did about 300 sfr's with an abbreviated JV type deal.

you would have to bring a lot more to the table to make it worth it for a capital partner especially if there was recourse debt... I think this is a tough sell... those with capital don't need you... those with limited capital need to be cautious lest they lose their capital with a new type venture. be interesting to see if you can get any takers

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David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

10y

I'm not in this space, so have no direct comments to add, but I have heard of @Account Closed doing some interesting small partnership arrangements that get around the Reg506B & D complications. I was meaning to ask him for details anyhow, but seeing as how it may benefit this post, I'll page him here ... paging Dr. Le, Dr. Le to the BP main lobby please ... :)

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Account Closed

Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes

10y

Ehab,

Sorry for not not having the time to read through all the posts. @David Faulkner, thanks for the mentioning.

I've had 4 partnerships and currently in a 5th one. Thank god, everything has been working out great. With that said, I have different structures for each partnership.

1) One partner pays me $10k for each deal I find and handle the rehab. He would obtain the loans in his name with both of us on title. Each partner contributes 50/50 capital, and we split the profits/losses 50/50. All deals were bought below fair market value so that's where the value add comes in.

2) Another partner is 50/50 in capital contribution for each partner. Since both of us don't have a job, we do things together most of the time so it's basically 50/50 for everything.

3) With respect to syndications and Reg 506B and D, we raise money mostly from family and friends. If we need to raise $500k, we sell 10 shares at $50k each. We structure it as a partnership where each person has one vote. If there's a tie, we flip the coin 3 times to break the tie. We charge an acquisition fee, asset management fee and disposition fee. Equity split is deal specific. All our deals are acquired with much upside potential so that's where the value-add is.

If you can find deals at 70%-80% FMV or ARV, you can make a case with your partner for 50/50 split as your contribution is the built-in equity. If there's not much value-add in the transactions, his suggestion sounds fair to me.

Best of luck.

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Thoughts about my partnership arrangement

Thoughts about my partnership arrangement

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