Partnership - What is risk worth?

[James Watts]

I'm trying to structure a deal with a partner who will not be involved in anyway. They have money, I have time(and some money that I prefer to save for cash reserves or other investments). Is it fair to ask them to put down the entire down payment and closing costs and then I pay them back at the rate of what the property management would cost for whatever amount of time that takes? Is there a more common or efficient way to go about deals like this? Any ideas or suggestions are very appreciated. Thank you. 

[Travis Sperr]

@James Watts Fair enough - wasn't my intention to beat down your idea and you are correct in the lack of constructive feedback. 

In the example of your partner putting up all of the money and taking all of the risk, to be paid back with what a property manager would charge ( assuming you are managing the property) would take a long time for their investment to be paid back. Not knowing the price point or rents, using an example of 10% of gross rents to pay back their initial investment - how long would that take?

They bring the money but you bring the deal and experience - a lot of value in both sides of the equation. Maybe better to determine the rate of return they are seeking for the amount of money they can put in. If it is 10% COC, you can structure the deal so they get net rents that would equal that amount and you keep the rest. Not knowing your long term play, would it make more sense to give up more on the rents to take more of the equity when you sell in the future? Who goes on title? Is the deal a partnership in an LLC?

After the partner's initial investment is paid back- do the profit splits change? If you have a turnover, who covers the costs associated?

The challenge when you are taking money from someone else partnership or loan, they are always more involved than they said they would be and you will feel a pressure to answer to them. When you have a partner and the property gets trashed by a tenant, you have to evict and rehab that requires a hard conversation. When you have a loan, you continue to make your payments and the bank doesn't ask why you selected that tenant or why you let them go 2 months before evicting.  

Partnerships can be a great tool, but they come with headaches - people change, circumstances change, markets change, etc. So important to spell everything out ahead of time and have a strong agreement that protects both of you.

Is it fair to ask they put up all the money - if they agree to do so - then it is fair. You are the expert in this transaction so you have a responsibility to provide a fair deal as you understand all of the risks in the transaction, where they are expecting that deal will just go as planned forever (even if they say they understand things could change, when they actually do change they forget).