Clarification on an aspect of partnerships

14 Replies

So I was curious about a certain aspect of partnerships. Let's say I use a partner to finance the down payment and rehab of a certain property and in turn we will be splitting the cash flow. Am I locked into this partnership and only claim half of the cash flow this property produces or is there a way I can buy back their investment and claim all of the cash flow?

I'm not apposed to staying in a partnership, simply wondering how long a partnership can last and how I can exit one should the need ever arise.

Thank you

Hi Adam.  I, too, am in the Lake Geneva area.  I have some rentals on the side that is all my wife and I but have a business partner that I have been working with for about 4 years.  My partner is more of the knowledge side--he is a jack of all trades and I bring the money and grunt work while we split the profits of our flips.  This is a nights and weekends job for me and Kevin and I have flipped 10 houses in the last 4 years with 2 more under contract to sell and we are closing on another next week.  The key is communication--you have to agree on a vision and communicate, communicate some more.  If you think you have over communicated, you haven't!  Partners are great, but they need to fill a need that you have that you cannot fill yourself and vice versa.  I don't have the framing, electric and plumbing knowledge and that is what Kevin brings while he does not have the money which is what I bring.  We hold each other accountable and are friends outside of the business.  Your partner has to be someone you like or going to work will be miserable.

@David Butler Thank you for the advice. That's cool that you're in the area, I have become a huge fan of Lake Geneva. How about length of partnership? Do investors repay their capital partners and then the partnership is dissolved or will you be tied to your partner for as long as you are involved with that property?

Originally posted by @Adam Amato :

@David Butler Thank you for the advice. That's cool that you're in the area, I have become a huge fan of Lake Geneva. How about length of partnership? Do investors repay their capital partners and then the partnership is dissolved or will you be tied to your partner for as long as you are involved with that property?

What have you and your partner discussed and agreed to? That's the answer to your question...if you haven't discussed and agreed to it, then you just found another thing you need to clarify within the partnership before you do business with one another. The answer to everything in a partnership is what did you both agree to...there isn't any set answer, everything is negotiable. 

 

@Adam Amato yeah tying into what @Matt Devincenzo said you have to agree to it before hand. You said you were working with a partner to finance down payment and stuff. Are they a hard money lender? Someone that lends money out and you pay them back their principle plus interest? Or are they looking for the continued cashflow. If they decide they want to stick around with and be a part owner with you would be good to seek legal advice to draw a contract. Because never know down the line what may happen you need something saying if the partner wants to pull their money out you can buy them out or they may want to sell the property and you want to hold it still

Originally posted by @Adam Amato :

@David Butler Thank you for the advice. That's cool that you're in the area, I have become a huge fan of Lake Geneva. How about length of partnership? Do investors repay their capital partners and then the partnership is dissolved or will you be tied to your partner for as long as you are involved with that property?  

 

It sounds like you are looking at more of a buy and hold mentality and those can be a little tougher. My wife and I own our own rentals as does my partner separate from one another but we do own a 4 plex in Lake Geneva together that had tons of deferred maintenance and super low rents. We have been dumping all of the rents right back into the property and neither of us has taken any money and have had to put a tiny bit in. It all comes down to what you have agreed to with your partner. Dave Ramsey calls them the D's: death, divorce, disinterest, drugs--what happens to you and your partner if one of these comes about. These all have to be ironed out before entering the partnership. All goes back to communication again.

It all depends on how you draw up the contract. You can set it up where the other person would have to buy out the others shares of the "business/asset." It's also possible to set it up where you could sell your shares to someone else outside of your contract. There's lots of ways to draw it up to achieve what you're after. You may consider consulting a lawyer to get a contract template drawn out for what you're after, then just tweak it yourself as you do deals. 

A solid partnership relationship starts with a written agreement.  A partnership agreement which outlines the responsibilities of each party, how one may exit the partnership (including first right shares purchase etc), and if the partnership automatically ceases by the occurrence of an event (I.e. selling the property).  What you're asking should likely be converted in a partnership agreement.  

The buying of shares (or additional equity % however you want to word it) can be done.  It's really just a matter of discussion between you and the partner.  Given this person is funding the deal you will need to work out some sort of terms in regards to their profit on the flip in consideration of interest due  One example would be for every additional $125 in interest payments to the partner you receive 1% additional equity share (making numbers up). If you aren't doing installment payments to the partner you could just set a price now that shares are worth.  Then for every $X you pay them, you get 2% equity share. 

Or you could just create a flat buyout. When the partner receives $89,500 total the partner may be considered bought out even if property sale has not occured. (Again, arbitrary number).  

@David Butler yes we are looking into the buy and hold strategy, more specifically we want to BRRRR a few properties in Milwaukee. I really want to do as much of the work myself because I want to learn what It takes to actually rehab a house. I figure that real world experience would help me better estimate rehab costs and the time investment that comes with them, plus I love working with my hands and learning new trade skills. We were going to hard money to fund our BRRRRs but we weren't able to meet the proof of funds requirement so we are looking into other options. Most likely we are going to house hack a small MFH and use FHA to finance it. My fiance and I both make decent money at our W2s, have very little expenses, and are excellent savers so we plan on being able to afford another MFH late 2021 early 2022.

Good Morning, Adam!!!! Everything should be indicate in the partnership agreement.  It will describe the breakdown of the owner of the company that the cashflow or net income. The partnership will generate revenue and once you subtracted the expense and taxes, this will be the profits that the partnership will earn which is put back in the company as retain earnings on the balance sheet. Thus, the partners needs to discuss how much will their salaries be which is part of the expenses paid by the company. The profits will be part of the balance sheet which details the value of your assets and the a partnership agreement describes what portion of the assets that each one owns. For example if your assets are valued at $1 Million and you own 50% the company, then your stake in the organization is $500,000. Your ownership is totally separated from the salary that you guys will be making. You will need a lawyer and CPA to break this down to you. 






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