What are common partnership terms?

Question

Last night I listened to Brandon Turner in his multi family webinar. Awesome job Brandon!  As a multi family investor, I am interested in securing a partner for my next 2-4 unit property but have some questions as to how these deals typically work. Brandon mentioned a structure where someone manages the property and someone puts up the money for the property and it is split 50/50.  If any of you have that in place, could you expand upon that? Brandon, maybe you could chime in?

Is it generally expected that the money person comes up with 20% down plus closing costs and repairs? Down the road, do big expenses also get paid by the money partner or should cash flow cover everything once the property is bought. Does money only get paid out to partners on the sale of the property? What are some common practices between 50/50 partners where one side is the money and one side is hands on.

Thanks!

Brandon Turner · Answer

Hey @Aaron Helmholdt thanks for the shoutout!

So, you may have seen this already but if not, check it out: http://www.biggerpockets.com/renewsblog/2012/06/03...

Also - be sure to listen to episode 92 of the BP Podcast where I share some more of my strategy to work with partners. And I'll hopefully write more on that subject soon also! (and a whole entire chapter in The Book on Investing in Real Estate with No (and Low) Money Down is all about partnerships!)

Bill Gulley · Answer

I think we're turning poor Brandon into a guru here, LOL.

He has the right idea, brand yourself, if people seek you out to fix problems, you won't have solicitation issues for investors, securities and investment issues.

I guess the actual conversation with Bob is in the upsell, LOL, it sounds good, but put reality in as a business model, dealing with the public and you'll have issues.

Bob should be known to you, I think that was implied, but having a "product" approach as this is what I offer and anyone can get my product is absolutely out of bounds if you want to stay out of jail. You can't publicly market partnerships like you might cookies.

I'm not saying you can't partner with your doctor, who would probably be an accredited investor anyway, but what you sell to him is not an investment product, it's an opportunity to partner on a specific transaction.

And, he might ask why you think you're worth 50% when most intelligent people know there are managers available.

Yes, you might get 50% selling it as a product, a program, people fall for that, they don't know the business, they may trust you, they may believe your pitch and if you go that route you don't have a partner, you have a client, a customer and you'll most likely be stepping all over compliance issues, especially when a deal flops and you can't return that investment they made.

Want a partnership, get educated so you can solve problems, brand your ability to be a problem solver, someone who gets deals done, known to make other people money, those you make money for will tell their friends and it goes on. It takes time to brand yourself as an individual or business guy who operates in RE. You aren't a hedge fund, you aren't a lender, you aren't an investment advisor, you aren't a licensed RE agent/brokerage, you sure aren't a REIT, you don't manage other peoples funds or sell any product or system!

Learn RE and ask your attorney if s/he'd like to own some properties! But you'll need to impress them that you know what you're doing.......gosh, how would you do that?

I enjoy reading Brandon's stuff, he does a great job at scratching the surface, but I'm not seeing any in depth analysis going on, you'll have to do that yourself. Good luck :)

Bill Gulley · Answer

Commerce is based on economic functions, land, labor, capital and entrepreneurship, it takes 3 of the 4 functions for any transaction to profit, but one is always involved, that is land, business must be conducted somewhere on the face of the earth.

If you don't have capital that means you provide more of the other functions, labor and/or entrepreneurship (or management).

Here are some examples of "earning in":

Labor, as just mentioned, by a contractor, fix what needs fixing.

Might have a property that has title issues, fix the issues.

Marketing, sit on site, everyday open house. A marketing system employed may include all kinds of advertising efforts, some projects require full time efforts. This is not just management but takes labor as well.

Management can be more creative in business transactions than a 1-4 family property, but what if the owner has problems?

I've done deals where an owner was ill, couldn't perform, take over and delay management fees over time as consideration to buy later at a better price.

Sales where there were tax liens or judgments clouded title, negotiate the release to allow the sale.

Negotiate for non-profit organizations in leasing from landlords or sellers, they have the clout to buy, many lack funds, use tax deductible contributions from a landlord or seller to bridge the down on installment transactions.

Estate problems, family fighting, step into title and deal with others that the other family member doesn't want to deal with or won't deal with. Partition of property.

Estate issues can arise from the sale of properties held long term, use trusts to set off the basis and charitable remained trust to lower tax liabilities.

Have credit but no money (or don't want to use yours)? Be a credit partner, co-sign as a guarantor. (I know, you could probably be the money guy, but you're not)

Partner with a land owner, put the parties together to get a property rezoned, or subdivided or contractors involved to develop.

Several threads have asked about two or more dwellings on one parcel. Buy it all from the seller with 100% seller financing, then do a minor subdivision separating the dwellings into legal lots, sell individually at a much higher price paying the seller off as each place is sold, you keep what's left over.

It's about identifying problems of buyers or sellers, identify the assets available to be employed to solve the problem, there are many times when there is not just a lack of money but also a lack of management or labor to bring parties to an agreed settlement.

What is needed and what can you bring to the table, can you solve the problem? If you can negotiate the value of that assistance. You can facilitate transactions if you are a party to that transaction, otherwise you may need a license.

In business transactions, say the sale of a business and commercial property, actually it becomes easier to be more creative, you have more moving parts, more avenues to explore, often business cash flow to work with. You can join either side, a seller or a buyer for solving the problems and making the deal work.

If you think in terms of economic contributions you can apply those functions necessary to solve a problem and bring value to the transaction, often, they can't do it without you! :)

Jeremy Tillotson · Answer

@Aaron Helmholdt I am doing a JV right now where another BP member will bring the funds, I am a licensed contractor and will GC and rehab the project, we will split proceeds 50/50. However I am bringing my extensive RE background and my GC abilities to the project. Why would anyone with money split a deal 50/50? it is because the other person brings value to the deal, otherwise it would be stupid, so while these deals happen it is usually with experience guys. I dont know Brandon he certainly knows a little bit about RE, and his being on BP gives him an audience that respects him.

Aaron Helmholdt · Answer

Bill, thank you for that detailed response, I really appreciate it.  My biggest question was why someone with the ability to purchase would split it 50/50 in the first place - something you brought up as well. That's why I am wondering what kind of partner deals people have put together where they are more of the legs and experience as opposed to the money side. Thank you for your experience and input.

Bill Gulley · Answer

Aaron, first off, if you hold or are looking for 2-4 family units, you aren't a multi-family investor, multi-family is 5 units or more by definition.

Partnerships are harder done than said, especially finding a money guy to buy with the down payment, closing costs and getting the financing. In reality, that money guy, if they have a brain, is going to ask why they need you at all, but at the least, why pay you 50% when they can buy it and get a professional, licensed manager who is insured and bonded for 10%?????

It's easy to come up with ideas and push them to fill in the gaps of some system, method, podcast or other media, consider reality. Saying 50/50 may not wash, a money guy might say 80/20 or 85'15 or whatever.

Partnerships are usually between known parties, where each have skills and money to contribute. Some approach a business arrangement where one invests the money and that entity provides management, such as a general partnership or limited partnership, the money guy may be in a lending position or they may act as an investor in an LLC structure. That manager then uses that money as they direct the business of that entity, they too obtain the loan and they assume greater risks.

Partnership arrangements are often made with a seller and a buyer, an old tired landlord may want out, the bring someone in to buy the place, they earn their way in a bit at a time from working and managing the property, earning equity over time until the buyer can ultimately buy out the seller.

You might get a 50/50 on a 1-4 family unit of net income, that 50% could be 10% of gross or less, each deal will need to be viewed on it's own merits.

Terms can vary widely. Things to agree to is who does what, the responsibilities, the authority of each party, what limitations there may be and what takes approval of all or most partners/members, how can partners buy out the other, what happens if they fail to perform, what do they do if one partner dies, becomes incapacitated or goes bankrupt? How are profits and losses to be split, they may not have to be the same. Will the partners agree to indemnify the others in certain matters, how do they resolve disagreements?

The agreements made take other things into consideration, it's not just about some deal, the terms agreed to are influenced by taxation matters or the partners, their estate planning requirements, if they are married and the ability of their spouse to take their place, if one can obtain insurance, their credit and ability to borrow if needed in the future, not just borrowing on that initial deal. Are the others to be active or passive in management, are they qualified to take on a project, any experience?

Prudent people get legal and accounting advice when forming partnerships, you can get your tail in a sling being a managing partner, taking on passive investors can have securities issues.

Just simply saying "here is a cool way to do this, bring in a partner and split the deal 50/50" isn't all there is to it, it may or may not be possible in reality on a certain deal or any deal. Sounds good, advances the idea, even if it has been done doesn't mean that situation can be duplicated by another person.

I have no idea what Brandon was suggesting, he suggests a lot, he has done different things I suppose, only he could fill in the blanks as to the details of what he has done. Regardless, you aren't Brandon, you don't have his skills, don't know who he knows, don't have the market he's in, you probably express yourself differently than he does and you two don't apply techniques to be used in certain situations in the same manner, as two situations or circumstances of two different deals are never the same.

So, the question you need to ask is "what are the chances that I can duplicate this idea"?

If you had mastered the basics of RE you'd be better prepared to answer that and be in a position of knowledge where some money guy can trust you to manage their money and their interests, you'd have a marketable asset in your abilities and knowledge.

Be it a seller or a buyer or a money guy, the first thing to develop is trust. From there your partner needs confidence in you. How best to do that? Think just talk and spin can accomplish that? I don't think so, not partners I'd get with, I want them to business minded as well. :)

What are common partnership terms?

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