I have a potential opportunity with a partner who wants to just be the money side of the transaction and I will take on all the other responsibilities.
I have heard Brandon talk about this in some of the podcasts but I am wondering how the payout works.
If we buy and I rehab, and find renters and property manage - we split 50-50?
When we decide to sell or refinance is that also 50-50? Would the partner get the initial investment first and then 50-50 of the proceeds?
Just wondering how others have laid this out.
Thanks in advance
50-50 would be incredibly generous to you and potentially unfair to the investor, however it is an agreement between private parties so it is up to those involved to decide.
@Blaine Kosek 50/50.
You put your sweat equity he puts the money what ever your agreement is 40/60, 30/70 or 50/50. Make sure it’s in writing clearly what each role each party is and with signed contract and that the exit for either party is clear.
Why not just have him truly be a silent money partner and loan you the money simply as a debt investor for fixed rate of return instead of trying to figure out a fair equity split and who does what? Would be a lot cleaner if he just loaned you the money at 10% (or whatever you guys agree to) and then you pay that to him no matter what, and then you own the property and are responsible for everything that needs to be done with it.
Thanks Aaron I do appreciate your input as this is my first attempt at using a silent partner.
@Kyle J. Thanks! This is a better idea and I do like this plan.
@Guifre Mora Thank you I appreciate you taking the time to give me your input.
@Blaine Kosek , it depends a lot what each of your goals are, how long you plan to hold them and what other options each of you has.
We have done a couple of these and are working on a couple more, with investors very interested. Where out situation *might* be different than yours (not sure) is that we had 20+ units under our belt when we started doing them this way.
The way we set ours up is that the Private (Silent) Money Partner bring 100% of the down payment. We find, manage renovation if needed (most of ours do not) do all acquisition, find and place tenant and do all ongoing PM & business management. There are 'the money' and we are 'everything else'.
We both need to sign on the commercial portfolio loans we do. All cash flow is split 50-50. Equity will be split 50-50 either when we cash out refinance or sell eventually.
Out plan is to hold for at least 10 years or more. This is primarily for the overall returns from equity growth (appreciation and loan paydown) WAY more than the cash flow. The Private Money Investor gets their original investment back before the equity is split.
We see it as a win-win.... we can 'make money' out of our management skills like having less than 2% vacancy, very long term tenants, low repair costs etc... compared to some traditional PMs. They get a great stable steady investment that diversifies from stocks and the like that they dont need to worry about. We can EACH make a 9-12% yearly compounded return of 10 years.
I disagree with the posted above saying 50% for you is 'very generous'.... not IF you deliver the kind of stats that we do....we earn it and still give the investor about the same return they might make with a traditional PM, with a lot less worry and work on their part. One of the other advantages to working with us is that their is virtually NO multifamily listings of any quality on the MLS, so we do calling and mailing to find units.... How would an want to be Silent Investor find those?
@Daniel Dietz thanks for taking the time to explain how you make this type of partnership work, I really appreciate it. I do plan take this type of funding on with my next project.
I'm trying this strategy now. Have already let a few properties slip by as it is taking some time to find a partner like this. Any recommendations? Family/friends are out and have not been able to find a reputable club to go to. Know it will take some time to build trust.
As we were adding to our rentals expanded when we eventually started to run out of capital for down payments we became more aware of using 'Private Money' in some way.... either as loans or equity partners.
It took a while to fully understand how things could work, but I did a ton of studying up on it. I probably 'over thought it' like I do most things ;-). I made a list of all of the potential people I could think of that *might* be able to fit that. One thing to keep in mind is that this could be with 'cash' or 'retirement funds' (we already were investing with out own retirement funds so were familiar with this).
My thought as I made this list was "who might have 50K or more to invest" and also had a personality I would want to be tied to for a decade or more. People who had good paying jobs, recently switched jobs and had 401Ks to roll over, sold businesses or farms recently, etc....
I 'cast a wide net' at first. I had names of some family, friends, people who have been customers of my construction company where we do a lot of work on higher end homes and vacation homes, people I was in civic clubs with and the like. I ended up with a list of about 50 people and 'ranked them' including who I thought would 1) Have the funds 2) who would be likely to be interested 3) who I would like to be involved with for a decade or more. Out of my list of 50 I had 6-7 'ranked 5' - meaning very good. I asked the top 4 and 2 are invested and one is waiting for me to find a good deal to do together.
I also like @Brandon Turner 's advice of telling EVERYone what you do. My 'elevator speech' goes something like "We and our partners invest in and provide high quality rentals in the Sauk County area as long term investments". If people ask anymore or show an interest we simply say "If you know anyone that might be interested in this opportunity please pass on our name".
Our first partners was a friend and someone that I 'talked investments with' on a regular basis and I knew he had a large protfolio and a good chunk invested in CDs with low returns. I approached him about lending on a flip I was doing to make a better return. It worked great for both of us - 5% interest only with a ballon at 2 years.
The next year we did a 'HELOC' with him on a house we owned outright in our SOLO401K at about 70% LTV to use as a down payment on a 4 plex that we now own in the SOLO401K also. All of the cash flow from both properties goes to paying that loan back in 5 years @ 5%.
Our first two private money Partners (opposed to lenders) we know in similar ways. Have known each other for a long time, great rapport, etc... and they heard what we were doing over a couple of years. They both are higher income people with either large saving or retirement accounts that they were looking to diversify. I also have one guy from my local REI group that is strongly interested in partnering (he is getting older and wants to reduce his work load but still stay invested) and a couple others that are interested in maybe using their IRAs to do so.
For these ones I came up with a 4-5 page explanation of how the partnership would work, how their investment would be secured, how funds would be split at any given time etc... Once we agreed to partner we formed and LLC for each one.
I think for a lot of people who don't think they know people like that you might be surprised. One good source could be people with old 401Ks from previous jobs that have not yet been rolled over. Local REI or Investment Clubs can also be a good source.