I am working on a couple of potential partnerships similar to this right now. The partner bringing the down payment would be a 'silent partner' and do NONE of the work or management. They would simply get 50% of the cash flow and equity growth. I would do ALL of the finding, acquiring, rehab management if needed and ongoing PM for my 50% of the cash flow and equity growth.
They would get their down payment back either when we sell eventually, or we are working on some options where we could do a refinance say maybe 5 years in and pay them the down payment back. The other plan would be to just wait until eventual sale, say 10- 20 years down the road they would get their down payment back before profit were split.
In our market cash flow is not exceptionally high, so it would be somewhat hard to pay back 50% of the down from just one partners half of the cash flow.
By our figures from the other 25 rentals we have in the area, we should each be able to make a 9-13% return over the long run when figuring cash flow, loan paydown, and 2-3% property apreciation on average. The potential partners I have been talking too also like the diversification of holding less stocks and the stability of real estate prices, at least in our are, compared to stocks also.
Originally posted by @Antonio Coa :
I’m planning to partner with a friend to buy a duplex where he is planning to use his credit and I’m planning to put the downpayment for the property. We are planning to split profits 50/50. However, as far as the downpayment, I would also like to get 50% of the downpayment back.
What is the standard structute to have my partner pay back the 50% of the downpayment? I was thinking either monthly payments through rental cashflow or at time of sale in the future? What do you recommend?
It was fairly easy before tax reform. The partnership would pay you a Guaranteed Payment for the use of your capital up to certain amount.
However, the GP are not included, does not qualify, in the new 20% deductions that you might be entitled to. So now the partnership have incentive to not pay partners via GP. If you want the benefit of not paying 20% tax on the money that partnership would pay you back, you have have to specially allocate rental income or set up the preferred return to meet your desired income that incorporates your repayment of down payment.
I am sorry that new law made it more complicated. You might have to get partnership agreement drafted by an attorney.