Okay, here's the situation:
I have a partner who wants to invest, but basically is relying on me to find the good deal. I see a lot of these 50/50 deals where there is someone who has the money, and someone who has the "brains". I'm curious to know what the general best practices are for this partnership?
a) Does one generally put all the downpayment/financing, and then at the end of year they go 50/50 on NOI? Trying to figure out what is the 50% that the "brains" guy typically receives.
b) Do we need to form an LLC + create a joint checking?
c) Any other general tips for a newbie trying to create a 50/50 partnership? He is a friend of mine and trusts my judgement - neither of us would get upset if a deal went bad (we've already discussed possibilities of losing money, and how it will Not effect our personal relationship)
Money changes everything. Have a written plan that address all the what ifs.
I would agree with @Bob Bowling , the possibility of having your relationship shattered is almost 100% if a deal goes bad. Given it will not, see a RE attorney, little more expensive but will save you both the trouble if a deal goes bad and perhaps run you real scenarios, both of you being newbies. Anyway, if it were me, i would like to recoup my money first before splitting anything, pay management fee for the person managing it, just like i would on all regular business and outsource everything -- say if you do the property managing, and it will cost me 5-10% if i hire a property management company, i would pay you that instead of hiring somebody else. if you have done some legwork both time or expenses before the purchase, i would reimburse that too, i might not add anything above it. the key is, assume that you are paying for services that came from somebody else, and consider paying each individual of what they are owed. on the other hand, if i were you, i would offer to only get reimbursed on my expenses, to sweeten the deal and not have the silent partner pay for anything without receipt, that means donating my time. anything between those two would depend on how generous you are or how generous he is.
hope this helps.
Thanks for the advice guys. I'm more interested on what the typical "50/50 deal" is composed of when one person is doing all the research and finding, while the other is providing all the financing?
Lets assume that neither of us are interested in paying one for research/deal-finding.
How is the cash flow/equity split? Is it just 50% of NOI goes to 1, and 50% of NOI goes to the other ? And both own 50% of the property?
The reason I ask is because that seems pretty steep for the guy providing all the financing, and I want to be fair, as I will be working with him for a while . I just want to make sure I understand the main fundamentals of how a 50/50 deal is stuctured, before we even go to a lawyer (which we will).
Maybe @Joshua Dorkin Could chime in here :)
There is no such thing as a 50/50 with a silent partner . 51/49 where you are the 51 % and you can tell the partner to be silent .
Would this be a partnership for Fix-n-Flips / Short term projects, or Buy-n-Hold rentals?
I think @Rohan J.
is asking for standard terms on a 50/50 agreement with a PML
@Daniel Dietz This is for buy-and-hold rental properties.
Just trying to see what the standard breakdown is for partnerships where one provides money, other provides research/deals. We would still use a PM company as we are interested in out of state investing.
That 50/50 split is generally something you'd see on a flip where on person finds the deal, manages the entire rehab and then it's sold and the partners split the money. Why on earth would someone give you half the profit on a rental if they're putting 100% in? I could pick random houses on MLS to buy as rentals if someone was fronting 100% of the money. On a rental if you're just finding deals then your share would be about what a wholesaler would make, other than that you're adding no value.
I agree to an extent.
There are plenty of people who buy properties that are just straight gambling (they don't understand numbers, they expect the house to just appreciate, they buy and end up putting in money every month, etc).
Having someone who is doing the right work and has experience (not saying I am the right guy) would definitely be worth a piece, especially if the guy with the money has no interest/knowledge of finding good properties. 50% of a good deal is better than 100% of a huge mess up.
Im pretty sure Brandon Turner has done several buy and hold deals in this manner. For some reason it wont allow me to tag him to this post.
I am just starting to dig into this too. I am much more interested in buy-n-hold rentals than flips for the most part. So far my rentals are in my SDIRA, and what I am looking for there is a better return than stocks and more stability over the long run, and also just the diversity of keeping some of my IRA in stocks and some in real estate.
I have been talking to a few different people that are somewhat interested in working together in some way. They range from
1) someone who is mostly interested in making non-recourse loans, a 'lender' if you will, for a fixed rate so I can leverage my SDIRA. They would have a known return and would be pretty safe as they would be the First Position Lender at no more than 75% LTV with my SDIRA being the rest.
2) Someone that is more interested in 'investing', who cash and also the ability to borrow if needed. We are still in the early stages of talking (he is also a very close friend as in your case) and thinking of something like this; he would be putting up cash or borrowing funds for maybe 75%, I would be in for say 25%. I would find the properties and do or hire the PM. He would essentially be a 'silent partner'. The split of returns of the profit would be 50-50 with me doing the PM. In other words, he has more money than time, and I have more time than money :)
3) I am also talking to 2 current property owners of paid for 6-8 unit buildings. This is in the early stages, but essentially they both know how I run my 'day business' and are willing to talk about how I can purchase their places with as little of my own cash (actually my SDIRA's cash) in exchange for paying them a full market value price (vs looking for a discounted building)
Hope that helps a little,
there isn't any of these deals around, pretty much it is what you make of it.
@Rohan J. seems like the 50/50 split works better (and makes more sense) with fix and flip deals. But if you can get an investor to put up 100% of the money and give you half the profits into perpetuity for finding the property and getting it rented, more power to you. But think about it from the investor's standpoint. The investor can "hire" a realtor (who will be paid by the seller, not him/her) to find a suitable property; then hire a contractor for a fixed sum to get the property ready for rental; and then either list it on his own or via realtor to get tenants. After that, he gets to keep 100% of the income. Why would he need you? Again, if you can get him to give you 50%, go for it.
But.... make sure you have an written agreement before you begin. I can foresee a lot of issues arising down the road. For instance, what happens if he wants to sell the property after 1 year, but you don't? Who is responsible for repairs to the property after it is purchased and rented? Does that come from the profits or will the investor put up more money? You should definitely meet with an attorney to discuss the pros/cons of setting up an LLC (or something similar).... especially if you are going to be renting. You don't want the personal liability.
Thanks for all the input guys. I think I misunderstood and thought the 50/50 agreement was for buy-and-hold rentals.
I'm sure there are people who have partnerships with investors to completely finance their rentals, but it looks like there is no clear cut answer/guideline on what equity the "finder" usually gets (assuming he puts no money down).
I'll try to find a few people at my local meetup and hopefully one of them has been involved in a similar deal
I also think long term partnerships for buy/holds are inherently problematic. You'd have to really be on the same page as far as how long to hold, under what conditions you'd sell, what happens if one partner's plans or circumstances change... just a lot of things that would be almost impossible to predict and account for in your operating agreement. And, as others have said you'd, have to have either a partner who was satisfied with a considerably lower return than would be available investing on their own or you'd have to be finding off-the -charts-good deals.
I could maybe see a scenario where you paid a partner a preferred return plus a percentage of profit for the duration of a contract. I'd probably want to structure that so that it had a definite timeline, e.g. the agreement would last five years (or whatever) and then you would sell. If you had a good value-add proposition that could be a good deal all round. Of course you could always agree to continue for another set period if it was working for both of you.
Now, I've never done this sort of thing but I'm starting to have people ask me how I can help them get into rentals, so it's something I've thought about. I'd be interested to hear from people who have tried to implement something like that- pros or cons.
So, here's what I've done. I've found a good deal, analyzed it, and approached a silent partner. They provide the "down payment" for the loan, and we buy the property together with both names on title. I then manage the property and handle 100% of everything, then we split all cash flow 50/50, as well as future appreciation (after, of course, their down payment is paid back.) This works pretty good for me, but it's definitely not easy. You have to have the right deal, the right partner, and the right skills. but it does work!
Wonderful insight @Brandon Turner , thank you very much! That was exactly the type of response I was looking for.
With so many people interested in real estate, I figured that there had to be people out there finding deals but didn't have enough cash. The idea of paying back the down-payment is what I totally forgot to factor in.
Did you guys agree to sell it after a certain point?
How was your overall experience with that property/partner? Curious if the experience was good enough for you that you worked with him again on some other project, or if you thought it was not worthwhile in the end and decided to stop getting involved in those deals.
If you are really good friends with the person you are going to 50/50 with, then the two of you can openly discuss all the possible outcomes of your first deal, and then write down the deal points that you agree work for both of you. The two of you can then meet with a local real estate attorney to draft a joint venture agreement. The attorney would represent the JV in the event there is a legal problem with the first deal.
After the first successful deal, you can modify the JV agreement for future deals based upon your experience with the first deal. The dollars invested to legally perfect your partnership will be money wisely spent.
When you say that your partner provides the 'down payment', is it the partner, you, or both of you on the mortgage then? Are there any tips for the 'how and why' of whatever your method is for that?
Thanks, Dan Dietz
@Brandon Turner I'd also be interested in hearing what documents have just your partner's name & what documents have both of your names
@Rohan J. thanks for starting this post. I've been posting and looking on BP for a couple of days now trying to understand exactly this. I am VERY curious how things worked out for you.
I have a similar situation where I have a colleague interested in financing some deals for me. We have discussed 50/50 split of the income after expenses, and 50/50 split of the profit after they are paid back their initial money.
This partner is willing to fund 100% of the purchase price, and potentially rehab costs to get it rented out, but I am just not clear on how to structure this in a way that works best for both of us.
If you have any insight since you posted this, I'd really like to hear it, as most of the other 50/50 posts on BP do look like they are focused on flips and not long term buy and hold rentals.
Originally posted by @Matthew Paul :
There is no such thing as a 50/50 with a silent partner . 51/49 where you are the 51 % and you can tell the partner to be silent .
Sure there is. You could even have a 99.9% silent partner to a 0.01% active partner. They're called limited partnerships for a reason. You could also do a similar structure using a manager managed LLC. Percentage doesn't necessarily mean control in non-corporation contexts. It all depends on how you structure the documents.
This is a great thread. I have two friends that I could potentially see doing something like this with. Does anyone on this thread have an example operating agreement that you would mind sharing for a 50/50 type situation like this? I would love to be able to structure a new LLC using an operating agreement like that as a template, and then adjust accordingly.
Note what Brandon said. It sounds like he didn't form an LLC. Rather he acquired and his and his partner's names as tenants in common (TIC). For buy and hold, this could potentially be important because they only way an LLC can use a 1031 exchange is for the LLC to acquire the replacement property with the LLC in exactly the same form (same percentage ownerships). With at TIC, each can take his/her proceeds and go their own way in acquiring replacement property, or realign their percentages differently in a new joint acquisition (you may hear about "drop and swaps," but I wouldn't go there). Also, when you form either a TIC or an LLC (or perhaps an LP), hire a lawyer to prepare a written agreement. This is very important for buy and hold because you need to have a clear exit, whether as a result of a dispute or just because one of you wants to liquidate your interest and move on to other things. For example, if your partner is truly silent, they shouldn't care when they exit so long as they get their return, so you should be able to buy them out whenever you want (a "call"). You also need very clear dispute resolution provisions (often resolved with a buy/sell provision) to avoid litigation and partition. In short, invest in the relationship up front by hiring an experienced attorney to explain all the moving parts, help you select your structure and generate a form of agreement for you that you can use for this and future relationships.
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