Partnering on deal with one other person

6 Replies

Hi BP,

I'm planning on partnering with someone on a future deal, the issue is they will be the one supplying the down payment which will roughly be $50-70k. We're going to do a simple 50/50 equity split on the ownership of the property and I'm offering him a 10% return each year based on the rental income. 

My question is on the paperwork... since he's the money guy, are we basically going to go to the bank and have both our names on the deed? If so, would that also be the case if we instead wanted to do a 70/30 split on the ownership of the property? This part of the process is a little vague, any insight would be very very helpful.

Thank you!

Christian

Hey @Christian Nachtrieb ! The borrower would be the entity. The lender would require a guarantor. Usually, all members of a the borrowing LLC with ownership >50% must sign the personal guarantee; basically personal guaranty is required for each owner of 50% of more. Some lenders do this if you own 20-25% or more. Also, most likely, the lowest of all borrowers' (the LLC's) representative credit scores will be used.

Originally posted by @Christian Nachtrieb :

Hi BP,

I'm planning on partnering with someone on a future deal, the issue is they will be the one supplying the down payment which will roughly be $50-70k. We're going to do a simple 50/50 equity split on the ownership of the property and I'm offering him a 10% return each year based on the rental income. 

My question is on the paperwork... since he's the money guy, are we basically going to go to the bank and have both our names on the deed? If so, would that also be the case if we instead wanted to do a 70/30 split on the ownership of the property? This part of the process is a little vague, any insight would be very very helpful.

Thank you!

Christian

 I'd keep it a lot simpler than that. You buy it, partner can be your private lender.

Borrowed funds cannot be used for the down payment, but borrowed funds secured by real estate can be, so it'll be a 2nd (or 3rd etc) mortgage on some property other than the one you are buying.

This keeps everyone's rights and responsibilities very clearly delineated, it's proof against differences of opinion on how to manage the asset, partner gets their ROI, etc.

Loop in a local RE lawyer to draw up the necessary paperwork. 

@Christian Nachtrieb The advice from @Chris Mason is good stuff.

If your partner's return is fixed (10%) then he's not really an equity partner - he's supplying debt that's collateralized by the income stream of the asset.  Señor Mason would know how to make that work with a loan.

I wouldn't personally put this person on title if they're just going to be silent money, and I wouldn't create an entity for this, even if you use the word 'partnership' between each other.

Thanks for the responses guys. @Chris Mason Could you elaborate just a little bit on securing the down payment loan with other real estate. Would it be a property I personally own like a primary residence? I only own my primary condo and another condo in downtown Boston so my portfolio is not expansive. Does this make the payments go up on said property?

Originally posted by @Christian Nachtrieb :

Thanks for the responses guys. @Chris Mason Could you elaborate just a little bit on securing the down payment loan with other real estate. Would it be a property I personally own like a primary residence? I only own my primary condo and another condo in downtown Boston so my portfolio is not expansive. Does this make the payments go up on said property?

 Whichever one has the equity to make your private lender feel secure, that's what you'd do the mortgage on.

Yup, this will be a distinct mortgage, with it's own payment... that you can set up so it's ballpark what your proposed partnership plan would have paid the partner.

Even though it's secured by a different property, you'd want to analyze the cashflow of the property keeping in mind that you're using some of that rental income to pay this private mortgage.

You are maintaining 100% control of the asset, so you don't have to fight with your partner over how to deal with a pesky tenant, etc.

@Christian Nachtrieb I have a real world example of using a different property as the 'secured collateral' in getting a loan for a down payment. 

We were purchasing a package of 3 duplexes and needed to come up with about 100K for the down payment on a commercial portfolio loan of 350K. We only had about 50K 'cash on hand' to put towards this. Put we ALSO had a paid off SFH that we already owned that was worth about 100K. I went to our Private Lender and had them do a First Position Lien on that paid off home for the extra 50K we needed. The Private Lender was happy as he had a very secure loan.

One thing to be aware of is that the property you are borrowing this down payment for must be able to cover BOTH payments. Or in our case, we pay are paying off the 50K that we borrowed from the cash flow of the SFH that it was borrowed against and should have it paid back in 5 years. Just make sure you know where that extra payment is going to come from.

Dan Dietz

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