Equity Partnerships for down payment

9 Replies

I have a family member who is willing to be a private lender and diversify from only being invested in stocks. I don't fully understand equity partnerships. Let's say I can get a duplex for 250k with 20% down, and he offers to put in the down payment. What would be a "normal" setup as far as percent ownership for the lender, and is that just paid out every month as a percent of any cashflow? What documents go into setting this partnership up, and would it require an attorney/CPA?  Lastly, would it be possible for him to use his SDIRA ( **he is an immediate family member)? 

@Eric Trompeter

A lineal family member such as a parent or child could not use their IRA in a deal that benefits you in any way, which is sounds like this would.

You should definitely work with a real estate attorney to draw up an agreement.  It protects both parties and possibly your relationship.

@Eric Trompeter   I did a deal almost exactly like this once, the partner put up 20% for the down, and I put the loan in my name.  We split everything 50/50.  That worked fine for us, and yes, used an attorney to draw it up.

Hope that helps.

@Eric Trompeter I am working on setting up a similar arrangement right now. Partner will put up the 20% down, which might  come from cash on hand or his SDIRA, and the loan would be in my name. This is through my existing commercial portfolio lender that I already have a relationship with. I will do all the work of finding, purchasing, prepping, and managing the properties. 

We are considering it a 50-50 partnership. We are working out details right now if there would be any 'cash flow' split, meaning would they get interest on their investment and I get compensated for the management, OR would we just take a look at things quarterly or yearly and split what was made that year. We are leaning towards the second one. We are both looking more for long term wealth building than current cash flow.

Make sure when you figure how to split equity growth down the road that you factor in returning their down payment amount before splitting things.

As to splitting things up on a more frequent basis - in my 3 current partnerships (3 members in each one) we do this quarterly. It is less paperwork, and it evens out the bumps of larger expenses a bit too. Things like water heaters, furnaces, siding roofing etc... As to the work we each put in - everything from bookkeeping, landscaping, tenant management, unit turnover etc.... we simply use Google Toggl to track our time. At the end of the quarter we are each 'compensated' for those hours first before the rest is split up 3 ways. It works great. 

My best advice is to make sure to put everything in writing, including what happens when things go south, if they do. My partners happen to be family, and we have seen business misunderstanding in the extended family, and we want to avoid that at all cost. 

Good Luck, Dan Dietz

Originally posted by @Eric Trompeter :

@Tom S. That's good to hear, and the lender didn't have a problem with the down payment coming from someone else?

@Eric Trompeter No issues, although it was a portfolio loan (kept in house) and I had an existing relationship with that local bank.

My only thought is don't gouge the investor because when they find out you have lost a life long investor.