Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
Hey there BP - Hoping to get some advice and insight from your collective wisdom. I've acquired a few properties now using a private lender. We were discussing that in the next couple of years that we'd like to look at purchasing larger commercial properties and possibly bring on some more investors. However to accomplish this my private lender is interested in becoming an equity partner moving forward. I'm super supportive of this for at least the near term as I do agree it will make it easier for both of us to approach additional investors on larger commercial deals. However I like the liquidity of single family homes and would hope to still be able to acquire them in my own name down the road either with my own funds as I build my capital base, or with other private lenders.
So I guess my questions is for those of you who sometimes invest on your own and sometimes with partners under an LLC, or have multiple LLCs where you invest with multiple people...how do you structure this to make it clear when a deal should be done under the partnership and when a deal can be done outside of the partnership? I know I need to speak to an attorney eventually on how to put all this in the operating agreement, but figured I'd get some advise and perspective first so that I can ask the right questions of both my private lender and the attorney before putting everything on paper and making it official.
I market with postcards and letters to find my deals. When someone calls me and we decide on price and terms, that is when I make a decision. I decide whether I am going to wholesale this propety or I am going to buy. If its a buy, then comes the question, how?
That is when I decide who I will bring into the deal and under what terms. I know different people who like different types of deals. I can pick who would be the right person for the right property or financing situation. It is all a matter of networking with many people to find the right partners.
I market with postcards and letters to find my deals. When someone calls me and we decide on price and terms, that is when I make a decision. I decide whether I am going to wholesale this propety or I am going to buy. If its a buy, then comes the question, how?
That is when I decide who I will bring into the deal and under what terms. I know different people who like different types of deals. I can pick who would be the right person for the right property or financing situation. It is all a matter of networking with many people to find the right partners.
I agree with @Rick Pozos, keep your options open to do some deals on your own or be able to partner on deals with others as well. Partnerships can be great or can be the worst decision ever. Just make sure everything is in writing up front and all partners understand the intentions of all parties involved.
Hi James! LLCs make things really simple. They are very flexible and you can get pretty specific in memorializing the partnership structure. I always put in my clients' operating agreements that the members may engage in other business ventures of any nature, including the ownership of another business, whether or not similar to that operated by the company, and the company shall not have any right or interest in any such independent ventures or to the income and profits derived therefrom. I would make sure that the LLC's purpose as recited in the operating agreement mentions a specific property. I would definitely have a lawyer draft the initial agreement very carefully, and then if you do another deal with the same investor, you can either do a quick amendment to that operating agreement, or if you use a different LLC, you can mirror the agreement from the first deal and just swap out the name and property address yourself. Hope that helps! Feel free to email or message me with any other questions.
Thanks @Rick Pozos, @Jeff Filali, and @Jessica Zolotorofe - I guess my questions were a bit more geared toward the specifics of things. Generally speaking I understand exactly what you've said and inherently understand all that to be true.
I guess it's more about how exactly do people handle these sort of things? Starting with the informal conversations. Like I completely understand Jessica where I can put int he OA that each party can operate separate businesses and that I can start off just identifying one property and make addenda to the OA for each subsequent property we add to the LLC.
But how do you address the actual relationship in real world terms. i.e. how is the conversation actually happening that says "I'm going to buy this for myself instead of in the LLC" How do I manage the expectations, and not ruin a great relationship over a business transaction. I understand it's plenty easy to have everything in an OA and be protected legally, but I'd also like to preserve the business relationship longer term, and more importantly that we've been friends for 20 years.
All I can offer is to have the conversation now and make sure there is a clear understanding that you are not doing everything together, it's not a business, but more of a joint venture on specific projects, and when one of you has a deal you want to partner on, you'll bring it to the other, but there is no obligation to either agree to do the project, or to ask the other. Not sure anyone can give you any real advice other than to approach it before you start your first project together.
I'd start by simply asking if they'd be interested in partnering on deals when you find really good deals that you needed a partner to be able to do. I'm not even sure I'd form a new entity until you knew for sure you were going to continue the partnership ongoing. A good JV Agreement may be sufficient at first, especially if both of you already have existing entities set up. An attorney could advise you better on that.
If you're worried about the possibility of a bad deal potentially ending your friendship, it may be better to just consider letting them be your hard money lender on deals. They'd still benefit and get a solid return, but it could prevent a bad deal ruining a friendship.
@James Masotti I would suggest that if this seems like a difficult conversation for you, so much that you think it could "ruin a great relationship..." that you may not have found a good partner or that the time is not yet right to do a larger project together. Do some small deals (either as a JV or by borrowing funds from the lender) and see how the relationship develops before entering into a partnership on a large project.
@Jeff Rabinowitz - Apologies if the tone of my post didn't convey my stance fully. Generally speaking I'm not worried about this. The private lender and I are on great terms and I have 0 issue trusting or partnering with them. But as it's my first time going down this path I was hoping to avoid any "unforeseen" pitfalls that other investors may be able to share. As the saying goes. I don't know what I don't know.
I know every situation is different, but figured it was worth asking how other investors handled things like this.