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!
@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.
@Bill Gulley Thanks for filling in the blanks on the LLC issue. I was unaware of the backdoor vulnerability. I've learned something today -- so now I can take the rest of the day off ;)
In pooling the opinions expressed so far, viable approaches run along these two main types
1) If equity partner is supplying less than half of the full acquisition + prep for rent/sale, then it's usually better to treat it as a private loan with a set return, secured or unsecured pending individual circumstances.
2) If equity partner is supplying nearly all the upfront costs, managing partner charge a fee for services (one-time general contracting/labor fee to prep [5-10k] and ongoing management fee).
In case 1, managing partner holds title, case 2 equity partner holds title.
This is based on the premise that sharing control of a rental real estate is usually a headache, so either hold control as the managing partner and pay interest, or let equity partner call the shots and charge them for service rendered.
This is for deals under 100k, higher numbers a formal partnership or setting up LLC with operating procedures and buy-out provisions would be necessary.
Ned Carey I agree with your disagreement with me. I think the problem that investors run in to is that the investor that is typically sitting in cds making next to know money values the preservation of capital and lack of rish inherent in fdic insured cds. Certainly they are losing purchasing power due to inflation. I agree that investors will look at their return on capital invested and analyze the perceived risk in whether they should invest. I'm not sure what kind of return's the poster is able to deliver but just as you wouldn't do it because you can do it yourself each investor is going to have their own level of risk they are willing to assume and i don't think too many cd investor are going to begin to speculate on buy and flip or buy and hold real estate. When I was saying I don't think 50/50 split was fair I'm thinking in terms of investors willing to speculate on real estate deals, but you are correct it would depend upon the expected return and perceived risk.
Now I am confused LOL
Agreed I used CDs just as a way to illustrate the point; not as an example of what would be typical.
I think we are on the same page. I was writing for the benefit of others. When you make any kind of offer you need to think of how the other side will evaluate it, not by what is perceived as fair.
I am buying and holding using a joint venture. I do all the work and my private lender is completely passive. We split incoming rent and the future equity 50/50. It is not hard to find JV partners when offering the equity participation.
Jim
Jim, that's common, been there done that. It's a win-win even for the mid level type managing investor types, not just starting out. It depends too.
Frank, you can do some really good stuff in an Operating Agreement, like having members as preferred stockholders and common, in concept...spliting voting rights, having other events of withdrawl and indemnification agreements.
Jon and Tim are on the same page, and Tim's mention of "speculation" a very good reason to partner is to limit losses and when much higher profits can be had, spliting the upper end for the comfort of the lower end is good thinking!
I searched for this topic to see what others thought because it's easy to have an unfair split. I'm looking to an JV partner for his experience and his money for my first deal. Columbus landbank has properties that are dirt cheap. ARV is somewhere between 70-120k. Large difference I know but can't tell just from zillow. But it's in the ball park. Purchase price is 6100. The repairs prob will be in the 30k range. The repairs is what we need help wit as well as the know how to execute a full reno. If he fronts the money, we'll refi after completion and give him basically a wholesaling fee. At least that's what I believe the agreement will be. We touched on it briefly. Hopefully this gives someone another idea on creative financing.
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.
i am facing a similar situation here. I want to buy and hold with my partner. your reply on this partnership looks very interesting. I wonder if you put your partner in the deed or only you are in the deed?
what is difference of buying with mortgage upfront or buying with all cash and refinance?