How would you structure this partnership?

17 Replies

We have 2 investors. Investor 'A' and investor 'B'. They live on opposite sides of the country, but have connected through the magic of BP and a partnership may be born.

They plan to pay cash to purchase long term buy and hold properties.

The properties will be located in investor A's market due to the cash flow opportunities. He already has a good size portfolio (50+ units) and a management company in place. Investor A will also be in charge of finding the properties to purchase, managing the rehab, placing the tenant and then managing the property going forward based on the systems he already has in place.

Investor B will visit at least once a year and keep an overview of the investments, as he also has the experience of owning 10+ rental properties. However his general goal will be "Mail Box Money"

Both investors have the cash available to purchase multiple properties.

How would you structure this fairly?

How much should each person own and how much should each person contribute?

If they each contribute 50% of the purchase/rehab money, how much should investor A get for his role of finding the deal, managing the rehab, and managing the property.

I realize that it is ultimately up to both partners to decide what is fair and create a win win situation, just looking for input, experience or suggestions from the BP community.

Thanks,

Josh

Josh Sterling,

I may be far off but in my opinion, it should be 50/50... However, you should be able to pay yourself a property management fee of prevailing rate (i.e. 10%) in your area. 

It may be easier to do this verses saying 60/40. As a partner, it may send reservations to Partner "B" in regards to control. 

However way you outline it, via MOU, JV, LLC, Trust, etc... Just place everything in writing.

Also regarding, who does what etc. Sometimes one may do work than another. It just depends on what each partner's strengths are. But I would start there and decide then.

Not sure if this even helps but thought I throw in my two pesos.

Respectfully,

Big Henry

Updated about 4 years ago

Correction: More Work than the other...

Why complicate matters?  

It's a partnership.  A team.  

If everyone does their job, 50% will suit each person just fine.

@Henry M.  

Thanks for the reply. I should mention that Investor A already owns a property management company, therefore he could pick up a new customer and make 10% for management plus 1 months rent for tenant placement for any property he managed. 

Would the benefit of the partnership be enough to justify just making a 10% property management fee for managing the property? What about finding the deal and rehab?

@Jeremy Timko

I think it would be ideal if one person could be in charge of acquisitions and rehab and the other be in charge of management and split everything down the middle, but that's not really an option.

Josh, 

My assumption and interpretation in regards to the role of finding the deal, managing the rehab, and managing the property is the same investor.

However, in my opinion, both should be active in searching, researching, performing due diligence, and acquisition of each property. 

As for managing the rehab and property thereafter will probably have to rely on the investor who resides in the location of any given potential property purchased. 

You have to define your roles specifically prior to partnership. Each has to hold each other accountable. Both should give input in all aspects of the partnership. If one carries the overwhelming majority of workload, then the partnership interest should reflect the return.

If an agreement cannot be made, then a partnership should not be formed. 

Draw up an MOU outlining the details of duties of each partner as well as return, then once agreed upon proceed to a JV, LLC, or other.

This may be general but this will hopefully help influence you before making a final commitment.

Lay everything on the table. Do one deal together, if all goes well then lockup into a longer term partnership. 

Just my two pesos. 

Big Henry

     I find properties, handle diligence, coordinate rehab, find tenants in some cases (in other cases property management company does), etc.  I do not do property management.  My investors do not know this market at all, and just write checks.  I know my markets really well, and am one of the few serious investors here.

     We split all costs 50/50.

For simpler deals (MLS listed, minor rehab) we then split the profit 60/40. Or you could phrase the same thing as I take 20% off the top, and then we split 50/50.

     For other deals where there is extensive rehab and multiple complexities, or where my marketing dollars and my salesperson which I pay for out of pocket have found the seller, we split the profit 65/35 (or you could phrase it as my taking 30% off the top, and we split the remainder 50.50).

     I hope this info helps.

I would make a partnership like this for the first year:

 - Property management at market or close to market.  Placement is a flat $300-$500.

 - Whoever finds the deal gets 2-4k acquisition fee.

 - Whoever manages the rehab, gets 10% of the rehab.  

- Money invested is preferred return of 6-8% interest and paid back upon sale.  

- Year 1, I think you should get 70%/30% of the houses purchased.   Year 2, 60%/40%.  Year 3, 50%/50%.  Your market. Your experience. Your money.

I would think long and hard if it is worth it.  If you are putting up 50% of the money, how much is the economies of scale add to your system?  Straight up 50/50 is little benefit to you unless all the services you provide are compensated for.  

After 1 year I would evaluate to see what is working before adjusting the ownership percentage.  

does anyone have a sample contract for this type of partnership? I am in the same boat a as I am looking to invest out of state with a partner but don't know what exactly should be put in the contract.

Hey Josh,

I think you are right that it is ultimately up to you and the investor.  That said, in my opinion, 50/50 doesn't seem appropriate. That amounts to awfully expensive capital for you. If, say, you were new at this and had no track record then you'd be a riskier investment and any partner would deserve a reward commensurate to such risk. That, however, doesn't appear to be the case hear.  

I have a 2 unit property I bought with an investors money.  Truthfully, it was the second property I ever purchased. He funded it entirely. If we sell he gets his capital back first. Any capital gains beyond the initial investment and rental profits are split 50/50. He gets 'mailbox money'. We contributed time and knowledge, nothing more.  

Good business deals benefit both parties in obvious ways.  I'd imagine that you have a number of options for raising capital. 50/50 seems like an awfully expensive option for you in this scenario.  For the investor, it's seems great!  In fact, let me know if you want to go that route, I'd invest in that!

Just my two cents. 

If your putting up 50% of the money and finding the deals and doing all the leg work and the other investor is simply putting in 50% of the cash and getting "mailbox money" that's a great deal for him,  the only benefit I would see to that structure for you is if there is a huge opportunity to build scale and mass and you need the capital..

In my mind If I was providing all the opportunity and doing the day to day I would want the investor to fund 90% to 100% of the deal and we split 50/50... Lots of work buying rehabbing and renting these homes.. Far more work than those that have never done it understand.

From investors B's position he or she probably wants to know you have skin in the game.. So maybe you put in 10% into each deal.

Also if you have this going on for you where you have wherewithal and experience and a portfolio you should be talking to B2R about financing 500k at a time for you.. super terms and you don't need equity partners.

I agree with @Jay Hinrichs  nrichs It's a lot of work buying, managing rehabs, finding tenants and then managing them, so 50/50 split is a little unfair to you if you both are putting 50/50 capital.

I would do how Jay mentioned in his last post.

How is 50/50 capital and 50/50 split any good for you? Instead of buying 2 houses together, you can just buy one house on your own and be the sole owner and not have to deal with any partnership issues.

I was wondering what is B2R

@Dan Dwyer  

its Blackstone's lending arm.. Blackstone as you may know is a huge Hedge fund that jumped into the SFR rental space buying 30k homes over the last 4 years or so in many different markets.. Well they also saw the need of investors that own portfolio of SFR's and can't get any financing because fannie Freddie 10 rule... And or local community banks generally will not lend on these assets or if they do its only to those that live and work in the community. So there is a Niche for Blackstone to provide capital for those that own 10 to 1000 or more SFR's and are looking for bank type financing.

And for Blackstone they bought all these homes with the hopes of a 6% or so return. And who knows how they are doing at that, But for them to lend at 5 and 6 % and not do all the work of sourcing and buying thousands of homes.. its makes total sense I predict there lending arm will far outperform there Asset arm.. With the exception of The west coast markets they bought in... They will do pretty good on some Atlanta stuff but then they also got caught up in the escalating wholesale prices there that put most of the turn key guys right out of bizz. 

They are located in Charlotte.  And you can get a LO on the phone no problem

I know of a few that have closed deals with them they were 2k million plus loans. Its not easy and its full underwriting but its also non recourse.  Tell the I sent you they will pay me a brokers fee  LOL

@Dan Dwyer  

PS there minimum loan is 500k... but they will look at inner city semi ghetto dog properties they just really want to make sure the operator knows what they are doing. And the loans are usually loans to COST not ARV as we know ARV is a figment of many peoples imagination in the Mid west and south east cash flow markets ;)

Thank You Very helpful.

Let's look at this deal from investor B's perspective.  Investor B is in for let's go with 50-60 percent of the seed money. Investor B has extensive knowledge of the rental investment business and is clearly not a beginner.  We are assuming that investor has had no connection with investor A, except research online (BP), phone/text,and email communications.  Investor B by proof of 10 rental properties can bring quite a bit more than simply money into the deal.  Two heads are better than one head type thinking.  Think about the risks investor B would be taking, being so far away and visiting once or twice a year to physically assess situation.  This investor B has also performed extremely well with rentals  many many miles away.  Investor B is clearly bringing much more to the table than may be seen by the naked eye.  

Albert Einstein once said, "nothing of great significance was ever accomplished alone."

From what I have been reading here, is that investor A is taking all the risks.  Right? With investor B being so far away, what if investor A makes a mistake and someone takes both partners to court, the risks are the same right?  They are both liable. Right?  Investor B is taking a significant risk not being able to monitor rehab, tenant evaluation, Tenant placement, tenant service once in the property etc... From what I am reading hear, investor A is THE management company and will be getting at least 10% or more to his/her management company fees plus half the tax benefits, cash flow, and what else?  Most of the deals are found on the mls right?  Of course if investor A has a proprietary wholesaler for all the deals, investor A should work out a deal with the wholesaler, that allows him a little more back in the deal than usual and lets investor B know what he will get for saving investor B sooooo much money as his part for finding a deal that investor B couldn't possibly find himself.  Don't you all think that investor B has done his/her homework and is a little more seasoned than the investor Joe Blow on the street.  Of course investor A would get a fee for being the general contractor on the rehabs.  Investor A has also stated he gets one month's placement fee too for finding a tenant too.  Just playing Devil's advocate hear.  Let me know your thoughts.  Anyone out there in investor B's shoes?  We haven't heard from that perspective as of yet.

Swanny

Josh,  a partnership like this could be problematic.  You are already active in the market and it seems like B is also.  What would you do if a property falls into your lap from sources that B had nothing to do with?  Do you want to give up the profit you earned from your experience and reputation? Should you?

Now B also has experience and, presumably, there will be situations where that experience will be valuable beyond just the value of the funding he brings.  However, his primary contribution is financial. 

It seems to me that a fair agreement can be reached if this is treated as a debt deal.  For every property which B puts up funds he gets an agreed upon interest payment and a lien on the property.  The interest rate should take into consideration what he would earn on his own deals.  If you put some funds in the deal you are increasing his security and, of course, the fact that you are an experienced investor and buy well also increases his security.  Increased security makes it safer for B to invest and that should be reflected in the agreed interest rate.  B should be well compensated with this arrangement (or he will not provide additional funds) and since he will be very interested in the operation you will also have access to his expertise when you need it, want it or maybe just for periodic consultations.  Since this deal is essentially being renewed with each property purchased it could be easily adjusted if the situation called for an adjustment.  

If either of you find deals unrelated to the joint deals you are both free to pursue them.  Hopefully, this arrangement will be profitable for both of you and you will form a lasting alliance.  If differences arise between you that cannot be resolved profitably for both parties unwinding this arrangement should be much easier than dissolving a partnership.

Jeff,

   Thanks for the response. Structuring it as a debt deal seems much more straightforward.

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