Thoughts about my partnership arrangement

Multi-Family and Apartment Investing
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Thoughts about my partnership arrangement

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

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

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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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  • Ehab Shoukry
    OP
    Investor · Houston, TX · Member since 2014 · 79 posts · 118 votes
    10y

    @Jeff Greenberg to answer your questions...

    1. The value in my opinion is 50% ownership in a multi that I would not be able to buy on my own and is in an area that is appreciating. 

    2. I am handling all of those items you mentioned and there is no specific compensation for doing that. 

    3. I still have to pay back the 50% but a you mentioned it will take longer now. 

    4. My partner is putting up all cash for closing, rehab etc. 

    5. Totally agree

    I think the alternative is to not do the deal or structure the partnership in a way that you think would be more fair. I'm probably not aware enough of another arrangement that would be more balanced. 

    @Account Closed based on the arrangements you described I feel like I have a pretty good deal. I'm not getting an acquisition fee but I'm also not putting up any money to buy the property and have very little financial risk except for co-signing on the loan. 

    Thanks. 

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  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    10y

    @Ehab Shoukry The more I think about this as your first deal, it is probably a good deal.  I was thinking more of an experience person doing a deal structure like this.  This is a good way to get experience and credibility.

    Our deal structure is usually around a 70/30 split (investors 70) with all investors funds in the deal. We make the deal happen and do all of the work.

    1Reply
  • Nathan W.
    Alexandria, VA · Member since 2014 · 140 posts · 45 votes
    10y
    Originally posted by @Account Closed:

    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......

     You bring up good points, and I may be naive, but at those payouts wouldn't it be cheaper to just get hard money?

    Why wouldn't you, for instance, just find a friend or family member with money and give them a promissory note at 10%, and get to keep the profits (cash flow and equity when sold, minus capital return) for yourself? Surely there is someone out there wanting to make 10% on their private money, no?

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  • Account Closed
    Lender · Dallas, TX · Member since 2015 · 283 posts · 128 votes
    10y

    Nathan,

    The formula above is just a sample, we adjust for each deal. Additionally, most our projects utilize non recourse financing and in excess of $3M. very few hard lenders at that level an even fewer friends.

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  • Nathan W.
    Alexandria, VA · Member since 2014 · 140 posts · 45 votes
    10y
    Originally posted by @Account Closed:

    Nathan,

    The formula above is just a sample, we adjust for each deal. Additionally, most our projects utilize non recourse financing and in excess of $3M. very few hard lenders at that level an even fewer friends.

     I got you.  That makes perfect sense at those funding levels.  The OP specifically mentioned a $100k property though, with the only cash out of pocket being the down payment of $20k or so plus closing costs.  I think the two cases are different enough to warrant consideration of a different approach.

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  • Jeff McCaskey
    Investor · Isabel, KS · Member since 2015 · 247 posts · 85 votes
    10y

    @Ehab Shoukry

    I was reading along here and wondered if you had thought of it this way......

    You say that you expect some rehab to be involved basically. So why not make the agreement in the bylaws/op agreement etc of the LLC such that you don't have to pay back your half of the 20% DP in cash from monthly cash flow but instead you assign an equity position to your partner from projects that you rehab.

    Example: 

    purchase price 70k + 20k rehab costs = 90k cash invested ARV = 125k

    20% DP of 90k cash invested = 18k   ***your 50% of DP = 9k

    Total equity in property after rehab = 35k   **** your 50% of equity = 17.5k

    Assign to your partner (your 50% of DP which = 9k) to pay back the portion that you would be paying from cash flow so that you can see income in real time from your investments. You would still have 8.5k equity in this deal. 

    Perhaps you could assign the remainder of that equity to your partner on deal number 2 if there was no rehab to push ARV above actual purchase price.

    Obviously this doesn't improve your equity position in the company nor exactly build your net worth initially. But from some of the verbiage you used it seems like you would like to see monthly income rather than holding an equity position.

    You could use a formula like this until such time you feel you have reached an income threshold that you could afford to pay back from monthly cash flow/pay cash for your portion of the down payment. At which time you would no longer need to assign an future portion of equity positions to your partner and would not need to go beyond your initial 50% agreement.

    I assume from the way you spoke that you are looking at buy and hold almost exclusively at this time.

    Just an idea, hope it's worth consideration. Good luck with your partner!

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  • Joel Florek
    Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes
    10y
    There seems to be a lot of critics but based on my experience trying to set up an identical relationship investors said "why do I need you?" Sure your bring a deal to the table but for most investors they would not give up 50% for just that. I think if you are confident this relationship will grow to more properties and that you offer your investor something more then just finding the deal then you have a very compelling opportunity that I would take!
    1Reply
  • Kathy Stewart
    Rental Property Investor · Dallas, TX · Member since 2015 · 243 posts · 70 votes
    10y

    I live in Ca. and am working with a potential partner in Lubbock as well as another in Florida to do the same as you describe. While striving for the best possible value, I stated up front I am not greedy, rather more interested in the long term relationship whereby both of us are comfortable and trusting of each other. For sure, we will clearly define the partner and/or JV details. I find that initially communicating I am open to the other party's ideas for the structure produces the best long lasting value and working relationship.

    1Reply
  • Pyrrha Rivers
    Investor · Yokosuka, Japan · Member since 2014 · 631 posts · 184 votes
    10y

    @Ehab Shoukry Thank you for posting this proposed JV structure. I would like to solicit additional input by posing my question on the subject.

    I live in Japan and have been contemplating approaching someone I've been working with in GA to propose a JV in student housing.

    He manages and maintains this asset class for a large corporation and I am interested in acquiring a small property for student rentals. 

    Here are my initial question about a JV structure using Ehab's example. (More questions to come on the details for exit/break-up if this first acquisition phase passes your scrutiny).

    My contribution - Down payment and closing capital 20% + 4%- 5% = $25%

    We are both on title in joint LLC

    My partner - finds the deal 10% value and performs the make ready rehab at his expense of time and capital 15% value. 

    He manages the property at a 7% management fee (could this be smaller since he's part owner?)

    We split the profit and expenses 50/50 

    Please comment on my idea which I'm sure has quite a few imperfections which I need pointed out.

    My goal is to make this a fair and mutually beneficial venture.

    If you're capital partner would you do it? If you say no, why not and what would motivate you to do it?

    If you're the labor partner would you do it? If you say no, why not and what would motivate you to do it?

    Thanks for your input.

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