Pulling out equity to replace Income

[Khurram Chaudhary]

I am building a large real estate portfolio with  relatively wealthy partner. He is pretty settled and is looking to just diversify his investment portfolio. 

I, however am focusing on building the same real estate portfolio with him eventually to take out some equity as a partial replacement of my income in the future.

How have investors in the past dealt with this? If he doesn’t need the money but I would like to pull some equity out for personal reasons. Given that we are exactly 50/50 in this for now. I would like to have the renters pay the equity back but I would have all of the gain while he would not (which I feel like is unfair). How would we make this more equitable if he doesn’t need and will likely not need the equity in the future? 

Thanks in advance! 

[Sean Hudgins]

#1 piece of advice is to make sure you're both very open about your goals and what is needed from the partnership. It does not sound like you are aligned right now, so you need to make sure you have some very serious conversations about the partnership. 

The simple answer is you use the cash flow from the portfolio to replace income, not the equity, and when the cash flow is pulled out, then you do so equally for both partners. The same is true for equity; if you need to refi property to pull equity out, then that equity should be split 50/50 and allow both parties to use the equity for whatever they please. 

The other option is to restructure the partnership. For this, you should have a discussion with the partner and sit down with a lawyer to draft up a new partnership that clearly lays out what each party is responsible for as well as what compensation each party receives. 

You say the partner is not interested in the equity, so my question is, why are they investing in the portfolio? Do they want the cash flow, or are they in it for the tax shelter? I would find out from your partner why they are investing with you, and I wouldn't make any assumptions.