Partnering with Friends to Invest in Multifamily

13 Replies

Trying to put an investment team together to buy multifamily units and open up free cash flow. Currently 3 of us are capable of putting between 30-50k down but wonder if it is enough to get an amount of units that would get us into positive cash flow. Also since this is between friends I imagine the LLC would be essential to draw out the plans that everyone agrees to. Any advice or ideas would be greatly welcomed.

@Andy Cav The cash flow really depends on the deal you find. You can find a positive cash flow deal with just $30k, but the amount of positive cash flow depends on the deal you find. In order to make sure you structure the partnership properly, I would highly recommend that you listen to episode 23 on my podcast where I talk at great length about partnerships...not just in real estate but in business in general as well.

@Sam Grooms I totally agree that you must make sure you have clearly defined roles and also make sure you don't run into SEC issues with the partnership. You need to make sure everyone in the deal is doing something so it does not get classified as a security.

Hello and welcome to this site Andy!  I just finished a book on buying and selling apartment buildings and it included what appeared to be very useful.  He recommended a type of Partnership called "Tenants in Common".  This way you can take all control no matter what your percentage is to the total and each Partner can be given different responsibility. I think you can start off with $100,000 cash and work your way up as you have more cash and experience and can afford a professional Management Company with about 30 units. 

I agree that positive cash flow from day 1 is important.  You may have to look harder but there's a good chance to find a smaller complex that provides owner-financing which is usually more negotiable.  You might need to be more creative to satisfy the Owner's needs.  For example, you might need two notes of different time that gives him the cash he needs but is still doable from the paid rent.

Just make sure everything is done in writing that you understand.  Your exit plan will be easier if you can add value to the complex by either raising the rent or doing some kind of improvements either to the interior or the exterior.  It is important that other complexes in your subject area is what they are doing and getting for rent.  It's location and access are very important plus the parking, impression, and amenities will be important too.

Good luck to you!

@Andy Cav definitely possible to find cash-flow deals, are you referring to $30k-$50k down together or each? 

As @Sam Grooms mentioned when setting a partnership it is important to set rules up front. who is in charge on what, what would be done if circumstances change and if one member need/ want to get out, etc, etc. 

you can start with brainstorming about these points and do a memorandum or understanding, or heads of agreement. then consult an attorney and put it to a joint venture agreement or partnership agreement, operating agreement. etc. 

It may make enemies out of friends.

If I want out of a deal, I sell the property.

If I want out of a 1/3 deal I may not be able to get out.

I also hear a lot of folks talk a lot about buying multi family. Like it or not if you ever want out you have to sell all and there are not as many buyers for multi family as there is for SFR's.

I bought 50+ SFRs before buying multifamily units. SFR's are easy to manage and sell(My wife still grips about the jump to multi units)

Of course I don't own class A Properties.

Just some of my opinions.

@Andy Cav Good question! Partnerships can get messy quickly without a written agreement upfront (detailing procedures when extra capital is needed, distributions for any tax due, exit strategy, etc). 

One item to be aware of if an LLC is formed and all 3 have ownership there are additional tax filing requirements outside of your individual return. You will file an extra return (Return of Partnership Income). 

Generally, the set up order is:

1. Form LLC (State Website)

2. Obtain EIN (IRS Website)

3. Open Bank Account

As other mentioned make sure you're not running afoul of any securities laws.

Strongly recommend getting legal representation and getting a detailed agreement in place. Some will recommend a lawyer per partner to make sure your specific interests are protected. Some may say that's overkill.  

  

@Andy Cav , I hope you don't mind if I hijack your thread by dovetailing off of it. Many LLC agreements are drawn up with VERY BROAD terms ("Members shall act in accord with the decisions of the Majority in Interest of the Members..." etc. etc.). So roles and responsibilities might not make their way into it.

To that end, I want to re-ask your question to Sam.

@Sam Grooms - I see advice like yours above ("give everyone roles") quite a bit It seems like great advice, but I have a two part follow-up: 1) Are you putting the roles and responsibilities right into your LLC agreements, or using an addendum? Not asking legal advice, just your personal preference; and 2) Do you, or anyone else, have good resources for what roles/responsibilities to expect, especially for newbies? Like a checklist?

Figure out a plan that works out for all parties involved.  Make sure that the agreement is in writing and that all involved understand the terms.  After that, find a deal that meets the criteria outlined and you're off to the races.  Best of luck my friend!

@Andy Cav I am in an LLC with my 2 bother-in-laws and we do both flips and SFR. I set up the LLC myself by filing the appropriate state and federal forms. The forms are minimal but if you are unsure or not familiar with doing this, consult an attorney to set up the LLC for your group and also set up a partnership agreement. Good luck.

@Andy Cav congrats on deciding to partner up with friends to buy multi-family properties! I, myself, partner up with friends and invest in MF. I think it's a great way to "get your feet wet" and learn off of each other because we all have different levels of real estate investing experience. We all share the rewards and limits our risks!

As many have already mentioned, you should start an LLC. We actually didn't start one until we had a deal in escrow. Once we started an LLC, we got an EIN to open up a business account to allocate all our funds there. For your deals, you'll also want to have an operating agreement that clearly states everyone's roles, the amount of equity each person put in, percentage of ownership, etc. A PPM might not be required if you all are "active" investors. However, I'm no lawyer, so you should consult with one first to see if you need one depending on how you structure your deal.

Oh...30-50k is plenty of money to start in MF. You just gotta find the deals and if you don't have enough funds, figure out how to get the funds needed!

Good luck!