Partnering for "buy and holds"

General Real Estate Investing 33 Replies

I have had numerous people around me interested in investing, but do not want to do it alone (no experience). While I am no guru by any means, I know a lot more than the average person. I am seeing potential opportunities here to partner with people...

Right now I am all buy and hold. No flips or anything. I would love to try to get a silent, cash partner who basically funds the purchase (just a down payment) and pays closings cost, etc. I would manage the property (I am already a property manager). I would like to split ownership 50/50 and have a plan that in 5 years we would have some kind of exit strategy (sell, keep, etc). We would split costs (repairs) 50/50?

My question is, how have you guys partnered on these kind of deals in the past? We would be doing a SFH up to an 8-plex. My goal is to get into a property for 0 down. Being young, I am ok managing it and doing the "dirty" work. I assume a good option would be to open up a new LLC for our venture. Any helpful info would be much appreciated!

Good luck finding an investor to front all acquisition costs for a 50/50 ownership split. Perhaps you meant sharing 50% of the profits and losses but with the investors name on the property title?

50/50 split seems a little steep to me. When you look at a typical hedge fund it is an 80/20 split. With those that put up the money gettting 80%.

Why not do a deal like that and get paid for property management at 10% before thet 80/20 split?

Also if you are planning on getting mortgages not sure if you are thinking fnma mortgages where it would need to be in the investor's personal name.

Just seemed to me that 50/50 split wouldn't be all that appealing. What kind of return are able to deliver for an investor?
What does a typical acquisition cost vs value and rental income vs expenses look like.

If someone has money, they could get anyone to do the property management, repairs, etc. So you have to make it worth their while to go with you.

Dawn Anastasi, Core Properties, LLC | http://www.coreprop.biz

You would have to work pretty hard or go really big to find buy and hold deals that cash flowed enough to be diluted amongst more than one investor...I would think.

It might work by deeding the property as tenants-in-common (money partner 80-90%, labor partner 10-20%), then draft an agreement with money partner pay all costs. The exit strategy would one to buy out the other at fair market rates after x-years.

Basically the money partner gets the majority of returns, labor partner has a vested ownership interest (and split of income), upon exit, one party gets paid lump-sum to sign over deed.

This assumes the transfer/structuring costs, insurance (plus liability concerns), and other costs do not add too much to the overhead.

That's one idea, feel free to chime in other approaches.

Leo I'm in the same boat as you at the moment. I have ten properties, and many people around me that want to invest in real estate, but they don't want the hassle of dealing with tenants, nor the re-hab, and day to day operation. I think you're going down the right path, because that's the same plan I'm pitching to my investors. They put up the 20% down, and we split the rent 50/50. The part of the deal that makes it attractive for the partner, is I pay the rehab cost, I manage the day to day operations, I collect the rents, pay the taxes, etc. That's very appealing to people who have a little cash, want to invest in real estate, but don't want to deal with everything else that comes with it.

Investors I've spoken to love the fact that they can park their money somewhere that relatively safe, and get a monthly return. Most people not familiar with the ins and outs of real estate investing just want to get a little better return every month that beats the bank, along with some tax advantages. I trying to draw up a partnership agreement now that spells all of that out. My investors were very receptive to leveraging my time and knowledge to get a return. I have capital to purchase a property all cash, then get a return from the investor, place the property in an LLC, and take a loan out on the property with a local bank, with me being the personal signer. This way the partner doesn't have to go through the "approval" process with the bank. Good luck.

Originally posted by Thomas Williamson:
Leo I'm in the same boat as you at the moment. I have ten properties, and many people around me that want to invest in real estate, but they don't want the hassle of dealing with tenants, nor the re-hab, and day to day operation. I think you're going down the right path, because that's the same plan I'm pitching to my investors. They put up the 20% down, and we split the rent 50/50. The part of the deal that makes it attractive for the partner, is I pay the rehab cost, I manage the day to day operations, I collect the rents, pay the taxes, etc. That's very appealing to people who have a little cash, want to invest in real estate, but don't want to deal with everything else that comes with it.

Investors I've spoken to love the fact that they can park their money somewhere that relatively safe, and get a monthly return. Most people not familiar with the ins and outs of real estate investing just want to get a little better return every month that beats the bank, along with some tax advantages. I trying to draw up a partnership agreement now that spells all of that out. My investors were very receptive to leveraging my time and knowledge to get a return. I have capital to purchase a property all cash, then get a return from the investor, place the property in an LLC, and take a loan out on the property with a local bank, with me being the personal signer. This way the partner doesn't have to go through the "approval" process with the bank. Good luck.

Thomas, thanks for that. It was very helpful!

Question, how much equity do you own of the property if you are putting nothing down? Initially I was thinking split equity 50/50, but after hearing people on here (and after thinking more), that might not be doable. When repairs come up, do you two split the cost 50/50? I guess ideally there would be some money in the LLC account to cover extra costs. Also, do you charge 8-10% management fees? What kind of properties are you looking to partner with? SFH, duplex or larger?

Thanks everyone for the helpful info! :)

@Zac P. Many of the partnerships I see, where the managing member contributes a minimal amount amount of capital, are structured something like this:

The non-managing members (i.e., the equity investors) receive the bulk of the cash flow year-to-year, perhaps as much as 90-95%. The split is different, however, when you sell the property, where the managing member gets a larger split, perhaps as much as 50% of the cash proceeds.

This sort of arrangement conveys an important message to the equity investors. It tells them that you are confident enough about the overall profitability of the project and about your ability to manage it that you're will to wait until it reaches a successful outcome before getting most of your share (although you'll probably take a management fee in the interim). You have to remember that these folks are putting a chunk of cash in your hands and relinquishing control; they're looking for tangible evidence that you believe you can deliver.

Something else that is very common to encourage investor participation is what's called a preferred return. Basically, that's a promise that the investor will receive X% on his or her investment each year out of the cash flow before any cash flow split with the managing partner kicks in. If there isn't enough cash to cover that preferred return, then the arrearage is carried forward and still owed, even up to the time of sale if necessary.

Finally, one bit of housekeeping since you mention LLCs and a plan to buy several properties: I would urge you to form a separate LLC for each property you purchase. A main reason for using the LLC is to isolate liability. If you purchase several properties under one LLC umbrella and one of those properties turns into a legal nightmare, it could jeopardize the others.

Medium logo realdataFrank Gallinelli, RealData | http://www.realdata.com

In my deals, equity investor gets a preferred return annually. After the preferred return is reached, we split 50/50. At time of sale, equity partner gets their initial investment back and we split the sales proceeds 50/50. Hope this helps!

Would be very helpful if anyone that did such equity-labor deals can do a numbers rundow, real or hypothetical.

Say 30k purchase price, 30k hard+soft renov costs, market value 80k at completion, successfully rented at 1k/month.

Intent as a buy and hold, how would this kind of deal exit? How is the title held?
Essentially what convention of a split makes it worthwhile for both the money and equity partner and appropriately manage risks.

Originally posted by Leo Cao:
Would be very helpful if anyone that did such equity-labor deals can do a numbers rundow, real or hypothetical.

Say 30k purchase price, 30k hard+soft renov costs, market value 80k at completion, successfully rented at 1k/month.

Intent as a buy and hold, how would this kind of deal exit? How is the title held?
Essentially what convention of a split makes it worthwhile for both the money and equity partner and appropriately manage risks.

great question, highly interested in the answer

I'm very interested in replies here for this "equity/ labor partnership".

I'd throw some other ideas and considerations into the bag. To recap here, the "labor" partner could provide management services which means everything from advertising property, finding tenant, leasing, daily management, pay for eviction if needed, guarantee to repair/ maintain property up to certain dollar amount per year, turnover, problems, etc. But does that warrant a 50/50 split on rent? Property management' s value is 10% of gross rent but what else.

But how much is that really worth? What is a fair percentage split and how is the property deeded?

Also, what if the "equity" partner stops paying mortgage or some other calamity?

@Thomas Williamson , what I see is that your "investors" get 50% of rents for 20% skin. Did you put a pencil to this? The other guy gets income from 5 properties with no management responsibilities for investing an amount equal to 1 property! That's great for them, but that means you're managing and going on the hook for 80% X 5 for the income produced by 2.5 properties! That's not a good deal for you. You'd do better borrowing the money at 15%!

Brian is on target here, if you're getting $100 a door gross and split that, 50/50 you're going to net less than a property manager most likely, that's twice the work for the same pay.

Frank made some good comments to think about from what he sees. But, I must disagree strongly against one property in one LLC, it definately does not shield you from liability if you lose personally in court, your assets can be at risk which includes all the LLC business interests you hold, there are many aspects that make this a bad idea that have been covered here by attorneys who were saying it's not necessary.....insurance is your line of defense and quality management is your first line of defense.

If your partnership is really on a fair basis, it would be that rewards were equal to risks assumed. Take a management fee and then the % of equity equal to the % at risk on loans and cash in. If you have no money you get the management income without risk. You can also use a note to the partnership, basically borrow the partners equity (if you make a good deal on the mgt side). Why would a partner share equity? Basically they are sharing appreciation which comes in a large part due to your upkeep and maintenance of the property and management abilities showing a good income, so it's a bonus for a job well done. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Bill I'm not sure your response was meant for me, or you meant to respond to someone else. Obviously every situation is different, and I guess I look at things a little differently. I think starting out (with OPM) sometimes you have to be willing to give up some returns, and work a little harder, in order to be even more successful in the future. As the old saying goes, I'd rather own 50% of something than 100% of nothing. I'm willing to let the investors get a larger share starting out, mainly because I want to attract more and more investors by word of mouth. I literally just had a conversation with my first investor (co-worker) and she said, "My husband and I love what your doing, and someday we would love to do it ourselves, but it's nice to give you the 20% down and not have to do all the work." Me personally, I'll take that deal all day long right now. I've got all of my systems down, and I manage to keep my tenants long term, so really, it's not that big of a hassle for me. This way I can keep acquiring more inventory. The market is starting to get tight in Atlanta right now.

Someday when I'm more established with a long term track record, then I can charge more of a premium to invest with me. I recently attended a syndication seminar in Los Angeles with Sam Freshman. He too recommended the same strategy when your just starting out. I love that real estate allows you to just be creative. Good points though.

@Bill Gulley I'm interested in learning more about what you say here, that there is no advantage to separating your properties' LLCs, because I've always believed that it was indeed important to do this to prevent liability from one property spilling over to another. In fact, I think at least one state (is it Delaware?) tried to address this by creating something called a Series LLC which is a single umbrella with "cells" (effectively, sub-LLCs) that isolate each property from the others. If you have any references, links, whatever that could shed more light on this issue, I would be grateful to receive. Thanks.

Medium logo realdataFrank Gallinelli, RealData | http://www.realdata.com

Thomas, I do remember starting out and egar to agree to things I'd never do now, my thought was that your deals might be longer terms, 3, 5, 7, 15 years, as you obtain more business you'll have anchors dragging yo in less profitable deals that you got involved with. But, if you are willing, by all means, have at it! Keep exits for yourself, like having your partner seller finance thier interest or just have sale option points along the way.... :)

Frank, I'm familiar with the Texas Series LLC and I almost opened one for Texas properties. I do like the concept, but it's not the same as individual LLCs. Accounting is consolidated, management functions and maintenance of the LLC, minutes, authorizations, etc are under one umbrella as opposed to having to address seperate maintenance issues of the enties. In some states, forming an LLC is not cheap, other states have ongoing fees and filing requirements, not only is it a pain, it can be expensive to have a string of seperate entities.

The lack of maintenance and attention to operations is the number one way to lose the liability protection offered. If the liability protection is lost, you become personally liable and at that point your ownership of all other LLCs becomes a target, not the properties inside those LLCs so much as the value of the company, then, in turn, liquidation may be necessary or required. So, they can come in the backdoor eventually.

Please allow me to summon or resident expert on finding threads on BP, @Steve Babiak ! There was a thread where John Chapman chimed in on these LLC issues.

The ones that make out with 10 LLCs for 10 properties are the attorneys and accountants, your insurance agent will like it too, with a seperate policy on each house instead of having a cheaper umbrella policy on 10 properties.

As to partnerships, getting back on topic, you can devise any standard LLC to operate as a Series LLC, with the cell concept through the Operating Agreement amongst partners, having buy sell agreements, options, gurantees between partners and lending arrangements. While such arrangements are not as bullet proof as a court acting in a matter with a Series LLC, if you have strong enough partners to back up guarantees and they are insured, you should be fine.

If we are getting off point perhaps we should start another thread on LLCs.

I'd still suggest you consider your management aspects and charge for the efforts and then address the sharing of equities. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

@Bill Gulley @Frank Gallinelli I'm in awe of your knowledge of the details, and I'd love to see you two comment on it more! In reference to the original post, wouldn't it be important for both parties to set a $ value to what they contribute to the deal in order to balance out the equities? For instance in a simple transaction where one person finds and manages a property, and the other funds, the equity by the money partner is obviously greater.

However; looking at it from my perspective as a developer, if it were a development deal where one person finds the property, and takes it from concept through final completion handling all the development and construction management side, and the money partner were to put in cash, etc. and the two sides split profits evenly, then an even split of profits would be warranted, in my opinion.

In placing value, it's much easier to look at the amount of cash invested in a deal, and the return on the money for the cash investor, and much harder for the non cash investor, therefore; how do you assess the value of the non cash investor in order to come up with an equitable split?

Medium tmg  1 Karen Margrave, The Margrave Group #00636992 | [email protected] | 949‑933‑3955 | http://www.themargravegroup.com

@Bill Gulley - maybe you meant one of these posts from John Chapman? (BTW - there are multiple BP members named "John Chapman".)

http://www.biggerpockets.com/forums/52/topics/75182-llc-or-sole-prop?page=1#p440434

http://www.biggerpockets.com/forums/67/topics/76244-flipping-properties-without-llc?page=1#p450416

http://www.biggerpockets.com/forums/109/topics/73385-liability-idea---property-in-my-name-but-managed-by-my-llc?page=1#p423965

One good reason for the multiple LLCs approach as advocated by @Frank Gallinelli - it sounds like the OP might have different partners for different properties. Rather than commingling funds and ownerships, separation using distinct LLCs could have some benefits.

@Karen Margrave Since my company has analysis software (including partnership structuring) for developers as well as investors, we get to talk to these developers and see a fair number of the ways they try to put these deals together. Probably the only thing I can say with real confidence is that there is no "one size fits all" structure.

One approach that we do see very commonly is for the developer to charge the project a fee (or fees) for the work he or she does in running the project through to completion. Then the developer may test several possible splits of the final disposition to see is there is a stucture where the equity investors can get an adequate IRR and the developer can also get a reasonable "promote" over and above the fee income.

Medium logo realdataFrank Gallinelli, RealData | http://www.realdata.com

Karen, I mentioned the equity based on contribution which is the custmary method.

As to your value, or the value of any partner, what I and others look at;

1. Money, this has two sides, first is the contribution to share the benefits, secondly, is the partner strong enough to suffer a loss, can they inject more if required, can the back up guarantees with thier check.

2. Experience, what's the track record in similar deals, is there a record of success or will one partner end up doing thier job and the other guy's?

3. Reputation, are they trustworthy, do they do what they say they will do? Are they known to be fair dealing? Will they work with you or will they see you working for them, how did they work with others?

4. Assets and liabilities, financials good? If you take every cent from them to make the deal, (1. above) and they have difficulties elsewhere, will they still perform or will they run, will they try to pull more out due to other losses? What liabilities do they have, judgments? Liens? Large obligations comming due? Contingent liabilities, are they involved in other risky ventures where they may get in a bind?

Tie these aspects together and weigh the value of thier participation. How bad do you need them, do you even want them?

Besides the money contribution, what would the services cost to do what a manager might do? Level of knowledge required. Would you need a CPA or could an account do it, what's a construction forman get, need a mortgage borker, what would that cost, is your partner well versed enough to keep you out of your attorney's office? Then, what % of time might be spent in each aspect of the duties?

As to work performed to earn your way in, what does it cost to hire out those functions? If all I get is a construction supervisor and I'm doing the deal, I doubt I'd give any equity as I can hire construction management and a mud boss.

Most investors over value what they actually bring to the table. Some may do a good sales job saying they can do, but when it comes time to crack the nut they are exposed, if you are the majority capital guy always make sure you can dump the other partner, to some extent, to get the deal done, finished, hiring out assistance. Remember the golden rule, he who has the gold makes the rules!

Be realistic, your services are based on you experience, abilities to perform and track record. So, Karen, if you have cranked out 28 medical buildings on time, on buget and sold or leased them up as expected, I'll look at doing number 29.

Now, to reality, the best partner is the one who doesn't need you, but wants you. One who can take up the slack if needed. Those are few and far between.

When you need a partner, you're at a disadvantage. If you're new don't blow smoke, but make up for it with effort, search for answers from good sources, be able to make sound decissions. Much of your return should be, in part, your education, paying your dues, having the opportunity to establish that track record. Consider that as well in the valuation of your contribution in a partnership.

If the other party is about as green as you, then you're on equal footing. Good luck!

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Originally posted by Steve Babiak:
Bill Gulley - maybe you meant one of these posts from John Chapman? (BTW - there are multiple BP members named "John Chapman".)

http://www.biggerpockets.com/forums/52/topics/75182-llc-or-sole-prop?page=1#p440434

http://www.biggerpockets.com/forums/67/topics/76244-flipping-properties-without-llc?page=1#p450416

http://www.biggerpockets.com/forums/109/topics/73385-liability-idea---property-in-my-name-but-managed-by-my-llc?page=1#p423965

One good reason for the multiple LLCs approach as advocated by Frank Gallinelli - it sounds like the OP might have different partners for different properties. Rather than commingling funds and ownerships, separation using distinct LLCs could have some benefits.

Thanks again Steve!

I was not aware we had more than one JC but not surprised, my appoligies to all the other Johns.

A well written Operating Agreement accounts for multiple members being restricted to certain projects, the capiatl accounts for each memebr, any loans, responsibilities to manage or perform, as to voting or restricted from voting, pledging assets as well as indemnifications to the LLC and any or all members, so there is no advantage, especially with insurance.

Thanks again for the links! :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

@Bill Gulley and @Frank Gallinelli I'd say you covered all the bases! I think we may have taken it a little further than the orignial poster needed, and helped further all of our educations on the subject. Thanks guys!

Medium tmg  1 Karen Margrave, The Margrave Group #00636992 | [email protected] | 949‑933‑3955 | http://www.themargravegroup.com