Investor · Los Angeles, CA · Member since 2011 · 15 posts · 0 votes
I have a partnership question for you all. My partner and I are just starting out. We have decided to invest in the Kansas City area because he lives there and it meets our investment criteria. I live in LA. I was initially thinking of looking into turnkey properties because I didn't want him to have to take on an unfair amount of work. However after looking around we felt like buying distressed and rehabbing would be optimal. Since he lives there it seems like he will need to take on much more of the responsibility. Do you all have any suggestions on how make it fair?
I think a 50/50 split between "work" and capital is a fair place to start, @Daniel Chu. Then adjust based on the deal, inherent risk, level of experience, potential return, etc.
@Daniel Chu I ALWAYS recommend finding a near turn key property with the assistance of a multifamily speciality agent. You are already doing something you have never done why risk it by adding another layer of risk with doing a rehab renno - only to make a few extra bucks. Buy a good property that needs minimal work that does cash flow. Maybe your partner just manages the asset. I hope this helps and if you want to talk further please pm me! Hope this helps.
I appreciate the response. If the money was 50/50 would you take less equity on the property if your partner was doing more work? I felt like I didn't want to do that.
@Daniel Chu, kudos on your decision to invest in Kansas City. I agree with @Alex Olson that following a BRRRR model from out-of-state may look good on paper but the reality is that it's damn hard to manage from LA. Having a local JV partner is cool, but it still requires finding the perfect deal to make it work for all parties... and those deals are hard to find nowadays.
I lived in San Diego for 10 years and invested out-of-state. Turnkey is, in my opinion, the best way to go for long-term results. If you want a quick buck, do a flip in your market; you'll learn from experience about the effort involved. If, however, you want long-term wealth, turnkey is better.
@Daniel Chu This brings up several questions. What role are you playing? Are you putting up all of the capital or are you both putting capital in? If so, how is it split? Is this a one off deal that you are doing together or do you see it as a business that you will scale up? If it's just a one off deal, I have to agree with @Alex Olson that turn key might be the better way to go. It doesn't make a lot of sense take on all the risk of doing a rehab in the hopes of saving some equity. The amount that you save may not be worth the risk if your goal is cash flow and you can get that cash flow right out of the box with a turn key.
@Daniel Chu This brings up several questions. What role are you playing? Are you putting up all of the capital or are you both putting capital in? If so, how is it split? Is this a one off deal that you are doing together or do you see it as a business that you will scale up? If it's just a one off deal, I have to agree with @Alex Olson that turn key might be the better way to go. It doesn't make a lot of sense take on all the risk of doing a rehab in the hopes of saving some equity. The amount that you save may not be worth the risk if your goal is cash flow and you can get that cash flow right out of the box with a turn key.
Thank you all for the input. Good questions Mike. My role is to take the lead in analyzing the deal since I have more experience in that area. Initially when I was thinking of purchasing turnkey we would both come up with half of the money. This is not a one off deal and it is something we plan to scale up. I guess one question would be should my partner be compensated with more equity in the property or should I put in more money to make up for doing less work? Also if it was a turnkey would it be fair to just split it 50/50 since it would be much less work than a rehab? I appreciate all the help!
@Daniel Chu This brings up several questions. What role are you playing? Are you putting up all of the capital or are you both putting capital in? If so, how is it split? Is this a one off deal that you are doing together or do you see it as a business that you will scale up? If it's just a one off deal, I have to agree with @Alex Olson that turn key might be the better way to go. It doesn't make a lot of sense take on all the risk of doing a rehab in the hopes of saving some equity. The amount that you save may not be worth the risk if your goal is cash flow and you can get that cash flow right out of the box with a turn key.
Daniel, every agreement is different but I would say that if you are putting in all the money and your partner is putting in the work, then 50/50 seems fair. If he's also putting some money in to it and doing the work, then I would think he should expect more than 50%. Whatver you agree on, just make sure you have a partnership or joint venture agreement clearly spelling out who does what and what the split is.
Thank you all for the input. Good questions Mike. My role is to take the lead in analyzing the deal since I have more experience in that area. Initially when I was thinking of purchasing turnkey we would both come up with half of the money. This is not a one off deal and it is something we plan to scale up. I guess one question would be should my partner be compensated with more equity in the property or should I put in more money to make up for doing less work? Also if it was a turnkey would it be fair to just split it 50/50 since it would be much less work than a rehab? I appreciate all the help!
@Daniel Chu how do you know your partner will take on more responsibility if you don’t even have the deal yet? Finding an agent to work with, touring homes, analyzing deals, finding lenders all takes time and is spent prior to closing. Who will take lead here?
Will your partner be meeting with contractors or will he be doing the entire rehab or will he be purchasing / delivering supplies? Are you looking for a small rehab or full gut?
Who will find tenants (you, your partner, real estate agent or property manager)?
Who will manage the property and collect rent?
I would go 50/50 on the first home going into closing with roles defined and then leave time re-evaluate the equity split after finding a tenant. You also need to define what your options are if one partner wants to sell off his share of the investment. Look to make the next deal more fair once you understand your roles in the partnership.
Communicate frequently throughout the development to find ways to help as an out of state investor even if it is just administrative effort.