My friend is a property manager for a property management company, and also a licensed RE agent. We are looking at rental properties which either he can manage himself, or the management company he works for can manage. Assuming we go on to do other deals together and considering tax advantages/disadvantages, how would you rank these deal arrangements, and what do you think are fair or ideal numbers for A, B, P, Q, X, Y?
1) He earns buying agent commission on the sale, and the property management company manages the property at market rate.
2) He earns buying agent commission on the sale, and manages the property himself at a discounted rate A%.
3) He contributes his buying agent commission to the purchase, and manages the property himself at market rate.
4) He contributes his buying agent commission and/or capital totaling X% of the purchase in return for equity P%, and the property management company manages the property at market rate.
5) He contributes his buying agent commission and/or capital totaling Y% of the purchase in return for equity Q%, and he manages the property at discounted rate B%.
6) Other - if so, what?
I'd chose #1 all day long.
People working at a discount soon forget why, so you are less likely to get as much support on your property as it deserves. That knocks out #2 and #5.
The buying agent commission (unless he is the broker or has both sides of the deal) is 1.5% of purchase price. So, you've added a lot of complexity for someone that really doesn't help you much. That takes out #3 and #4.
Also, with any of the alternatives, what happens if your relationship goes sideways? It is easy to fire a property management company but very hard to fire one who is also your partner.
Wouldn't 4) where he put up his 1.5% commission plus another 48.5% for a total of X = 50% of purchase price, for P = 50% equity with the property management company managing be pretty fair? The main problem here I see is if he decides he wants to manage it himself (5), and then we have to decide his management fee B.
Yes I agree it would be very hard to fire your partner, so that's what I'm exploring if there's anything else that makes sense other than 1).
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