Split Half the Downpayment w/ a Business Partner?

Question

I have a creative financing idea that I want to run by you all. What is your feedback on the legal & tax ramifications?

I'm planning to buy a rent-ready vacant fourplex in Cincinnati, OH. I don't have enough cash for the downpayment so I decide to bring on a passive business partner who helps pay for 50% of the downpayment & closing costs while I get the title & deed. In return the business partner gets a monthly rent check starting on closing date for up to 1 year. After that 1 year is over, I pay back the 50% of downpayment & closing costs directly to the business partner and the partner no longer gets the rent checks. I have the property manager, realtor, contractor, and lender contacts in place while the passive business partner brings only money to table. What can go wrong?

James G. · Answer

I'm very interested in a JV especially for a four-plex but would want cashflow forever. Not just 1 year. I'm interested in long-term buy and hold. I do have cash I could use as a downpayment.

Susan Tan · Answer

@Daniel Volk In a simple partnership, I wrote up 8-10 slides in Google for a potential subject property. Since I'm investing in that neighborhood, I can swap out the fourplex with another similar fourplex to re-use. I've sent it to friends as a draft. I thinking of taking a class on how to find investors.

Daniel Volk · Answer

@Susan Tan I am interested doing a similar process in Cleveland, Ohio. How did you initiate the conversation with the investors? Did you have a plan written up ahead of time? Did you know them before? I'd appreciate any background you could provide.

Susan Tan · Answer

update: I'm planning to write up a business plan to get at least 5 passive partners on a fourplex in Cincinnati, OH to buy in cash under my LLC (I would hold title & deed) and then give back the initial investment money in 1-4 years while they get monthly cash flow distributions. Is this called a PPM? Have you done this before and if yes, what should I look out for?

Chris Teti · Answer

@Susan Tan You could also get lines of credit in place for yourself so you don't need the partners $$.

Christopher Phillips · Answer

That makes sense. But it means you won’t account for reserves in the first year while paying the partner. That puts you on the hook if the roof or boiler/furnace has a problem. Things go wrong in rental properties - even when turnkey.

Susan Tan · Answer

The partner gets the monthly cash flow AFTER mortgage & utilities are all paid off. I'll pay for repairs & renovations out of pocket. If there's a vacancy, I'll pay for mortgage, utilities, real estate taxes, & insurance bills out of pocket while partner won't get cash flow for that month.

Christopher Phillips · Answer

@Susan Tan

You'll have to run the numbers. Questions: Is the property cash-flow positive after the reserves? If the rent check goes to the partner, how do you plan to pay the mortgage? What are the expectations if you have a vacancy? Do you still owe the partner a monthly payment, and what about the mortgage and utilities in that case?