Partnering on Multifamily Property - Need Advice

[Trevor Martin]

I'm looking into purchasing my first multifamily property with my real estate investing mentor (50:50 split ownership). It's a 12 unit building that will require a down payment of ~$90,000. My mentor (potential partner) has all of his cash tied up in another property at the moment, so he suggested I be the financial partner and he be the managing partner. I have the cash, but need help figuring out a win-win partnership.

I'm new to real estate investing and he has been a godsend. In three short weeks, with his help, I've purchased two single family homes that will be very profitable. He's managing them for me as well, and has already put two great tenants in them at above-market rents. He's streamlined the entire learning curve and has always made himself available to me. For this reason, I want to make sure he gets a good deal out of our first multifamily partnership. That being said, I don't want to give up 50% of the building just for management (which he normally charges 8% for).

If I put up the entire $90,000 down payment, how do you suggest I get my $45,000 (50%) back? Since only he will be managing the building, I thought about offering not paying him management fees until that $45,000 was recouped? Is that a good idea, or how else would you approach this?

Thanks for your help!

[Jon Holdman]

If you put up the entire down payment, you should get 100% of the ownership. If you want to hire this guy to manage it, OK. But he shouldn't get any equity stake for the management.

Have a look at this thread:

http://www.biggerpockets.com/forums/517/topics/84860-amatuer-investor-seeking-partnership-on-creative-terms

Toward the bottom I wrote an explanation of how the equity gets split.

The mere fact your "mentor" suggests you should put down the entire down payment and he should get 50% of the ownership makes me HIGHLY suspect of his motives. I wonder if these rentals he's put you into are actually good deals. Here's a simple test. Is the rent DOUBLE the P&I part of your payments? If not, they're cash flow negative. If it is, by how much? That's your real cash flow. Multiple by 12 (for a year) and divide by the amount of cash you have invested. What percentage is that? 10%? OK. Higher than 10%, good. 5%? Bad. Negative, really bad. He's making money on the commission for selling you the house and for managing it. Unfortunately, you're losing money if these properties are cash flow negative.