How to Structure a Silent Partnership?

Question

Hello, let's say I have a relative with available capital that is looking for ways to generate a little income, and I have much less available capital.  What would be some win-win ways I can structure deals in which he invests the down payment but I identify and manage the properties?  For background, he is in his early 70s and I am in my early 40s, so our timelines are not 100 percent aligned.  Thanks in advance.

Scott Smith · Answer

There are always a few ways to conduct a partnership, but LLCs are are good at providing liability protection - you can check out this article for more.

You also mentioned your timelines were different. This for me can be something that is a red flag. Be sure to have a few discussions so you are both on the same page regarding payouts and time/money invested. Having one partner want to back out early can turn any partnership into a nightmare and strain any relationship - better to have any hard conversations early and lay out contingencies for different outcomes. The operating agreement can make or break a deal, so be sure to have an experienced attorney help you put that together.

Best of luck to you. This isn't legal advice, just my opinion as a real estate investor.

Rich Littlefield · Answer

I would put the money in and own the properties in  an LLC  and or maybe an S corp. You would then make him a partner and you would be a general partner.  This gives both of you a lot of protection.

Account Closed · Answer

It depends on your (and your relative's) risk profile.  You could bring them in as a lender where you pay an interest rate either current or accruing, and then return the principal when the house is sold or refi'd.  Bringing him in as a partner (or LLC member), you both share the risk of loss and a 50/50 or 60/40 split might be more in line.  It is not uncommon for a preferred return to be paid to the equity as well.  This would be paid before any profit splits.

Rich Littlefield · Answer

That my friend is for the two of you to negotiate.

Howard Handler · Answer

Thanks @Rich Littlefield and @Scott Smith.  I guess more specifically, I'm wondering about the finances, not the legal structure.  What would be win-win?  He provides the downpayment and I identify and manage the properties... and we continue on 50/50.  Or... he provides the downpayment and I pay the downpayment back over a certain period of time at a certain interest rate?  Or... something else?

How to Structure a Silent Partnership?

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