How would a partnership work on a buy-and-hold?

1 Reply

Hi BP! We (my PM/father and I) are meeting with our first potential partner (PP) later this month. We have done 3 deals by ourselves. Our PP has 1 rental property, but I don't know any details on that. He did say he wants to "learn how it works," so I'm under the impression his experience is limited. He would be bringing the capital to the table. 

Part of this meeting is to determine whether or not our goals align. I'll also be asking questions like what kind of return he's looking for, whether he wants to be active or passive, his budget, what kind of assets interest him, and when he'd expect to receive that return. 

My original idea was for the PP to finance the property and repairs. We would handle the negotiations with contractors, oversee execution of the rehab, and find a renter. 

My PM and I want to walk away with a buy-and-hold. We'd like to give the partner 100% of whatever "profits" (so I guess that means equity) we create through the deal to start off because 1) we're still relatively inexperienced, 2) we want him to come back to us again to do more deals, and 3) we want to be able to show other potential investors that we can earn them a solid return.

The part where I get stuck is exit strategy. Do I hold title, refi out at the end, and pay the PP through the refi? Here's another question--If my income were to change from a W-2 salary to commissions within the near future and I became unable to refinance the property because of that switch, then what? I suppose he could assume title and just keep the equity and property (or sell it if he prefers). We'd still end up with a partner for future deals and an established track record, which is likely more valuable than a single rental property. 

I'm open for any advice--questions to ask when we meet, ways to structure the partnership, or anything else that comes to mind. TIA!

Hi Nicole - There are clearly a lot of details to be worked out. With partnering, I've found it best to take things one step at a time. I articulating what everyone's goals are is a really important place to start, because if your goals aren't compatible then all the other questions are mute. I'd focus on just goals for the first meeting, then go home and create a few possible deal structures that meet everyone's goals, and schedule a second meeting to share them with the PP and see which one looks best. 

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