Forming an REI LLC as a capital partner

7 Replies

Biggerpockets,

I'm researching forming an REI LLC with my partner where the responsibility breakdown would be I provide purchasing capital and he provides the actual boots to the ground work to find deals, execute, and do maintenance/landlord work on them (and find mortgages for us).

We're based out of the midwest so I figure we'll look into houses fitting biggerpocket's success models (50% rule etc) in the 50-70k range, ideally with mortgages that require 20-30% down.

What is a fair and appropriate ownership breakdown for the LLC? If I am providing all of the capital, and he is providing all of the elbow grease? Should it be 50-50? Something different? What is the best way to calculate my rate or return on my capital given partial ownership?

Thanks.

Not sure it sounds like you are providing "all" of the capital.  You mention you need to obtain mortgages.  In most cases, mortgages represent "most" of the capital.  Mortgages might be a barrier you do not fully understand yet.  If you expand on your brief comment, surly some commentary will follow on the idea.  

In order to calculate your rate of return you would need to understand how much capital you are injecting and how and when that is paid back.  

It sounds like you are interested in buy and hold type stuff.  So long term debt can be a solution.  A simple straight forward 50/50 split never hurts.  Depending on the workload and amount of assets you might look to compensate your partner on his efforts for rehab and property management.  Services that might otherwise require a third party, if you will, that he steps into those shoes.  This might also help make this full time opposed to part time for him, which may work out better for both.  

It's tough to comment further with such a broad spectrum of possibilities.  How much capital are you actually putting up?  We might be able to give you some insight as to how many units that could translate into.  How long do you want to stay invested?  

Dion,

I am aware of how mortgages work. I meant all the investment capital. That is, the money down for buy and hold properties that can float themselves via 50% rule.

The partner would not work full time, and this would not be a full time business but rather a long-term joint investment strategy. Basically, I can provide ~$30k-40k per year so if he could find 2 or 3 properties a year in the 50-70k range that we could invest in as buy and hold it would be a win. Property would be held in separate LLC's with separate mortgages. I understand that this is difficult (finding the deals, and getting mortgages in an LLC) but that is what the partner would invest as opposed to money.

Does this sound like a viable strategy?

@Bob Steward  What I would do is offer him 50/50 of the equity appreciation when you sell or refinance and you get 70/30 on monthly cash flows. You could also pay him 10% property management fee before taking the 70/30 split. 

@Paul Lopez  's structure is a good example of how to structure it.  Something along those lines will work.  

I suggest you only use one LLC and not one for each property. That is simply over kill. Inside the LLC operating agreement the two of you will agree to managerial terms over the assets and company. So, who has to respond to property manager issues, who is responsible for accounting, etc. Any attorney can help you setup the operating agreement to accommodate your different roles and contributions. Since it is just the two of you and presumably the terms of contribution and roles will not really change from property to property, you only really need one LLC.

Good luck.

The idea of having separate LLC's is to limit the liability of any one property to itself.

@Bob Steward that concept is mostly preached by those who stand to gain from it. One LLC with good insurance on each property, along with an umbrella policy, provides good protection for a number of properties.

From past experience, if you want to form a partnership in an LLC, never use a 50-50 formula. Do something like 49-51% formal. Someone needs to be in charge.

The reason being that if there is a conflict or some need to dissolve the partnership, a 50-50 split could mean litigation to no end since there is no primary owner of the company. 

CK Hwang, Redwood Investments LLC | [email protected] | 9496329632 | http://www.redwoodinvestmentsllc.com

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