How do you structure partnership investing?

Question

I am beginning down my journey through a partnership and I’ve heard many BP podcasts and have read people doing them, but not much detail on what it actually entails on paper.

For example how does ownership reflect in writing? Are people tying it all to an LLC? How do banks loan if it is a partnership vs sole?

I assume “it generally depends and I should talk to an REI lawyer”, but generally interested in how other people are approaching it?

Daniel Dietz · Answer

@Steven Asifo the advice above is spot on.

I am involved in several partnerships including one that is a bit out of the ordinary, and hopefully several more of these shortly. These are for rentals that we plan to hold at LEAST 10 years, and likely much longer.

The 'private investor' we are working with bring ALL of the down payment (20-25%), we bring ALL of the work of finding, funding, rehab management if needed, and ongoing PM and business management.

It is a win - win situation. They have funds they want to put to work that were sitting in very conservative lower yield places, and we have a great track record and the ability and time to take on more units.

We split all cash flow and equity growth 50-50, and when the private investor eventually wants to 'cash out' they would get back 100% of their original down payment investment before we split things 50-50. We do this within an LLC that has all of this spelled out. All parties have to sign on the loans, so the private investor has to have a huge level of trust that we are going to do a good job.

Dan Dietz

Steven Asifo · Answer

@Ashish Acharya

This is really helpful to understand! Thank you for taking the time to provide such a detailed response. I will be referring back to your post so I can keep this info in mind

Ashish Acharya · Answer

Generally, you would want to get the into the Limited partnership rather than just a handshake general partnership for legal protection.

That is why most of the people will enter into partnership by creating a LLC for a venture with two partners as member of the LLC or creating a SMLLC and entering into the partnership agreement with another person or  person’s LLC. And you can make it as complicated as you want.

At the end, the partnership structure  depends on what you are trying to accomplish.  If partnership is simple based on the capital contribution percentage, it is pretty straight forward and can be drafted easily with or without attorney ( attorney recommended)

The reason you dont see the detail instruction here is because it cannot be laid out like that. You do need to get with attorney or accountant to see what structure is right for you. People share general applicability here in the forum, not specific.

Bank will generally want the person in the title of the property to guarantee a loan. And, most of the bank will not provide residential loan to a LLC.  That is why people debate here if LLC is really required as you have to transfer the property back and forth from LLC to you and LLC to get a loan stuff. While beginning, a good insurance should suffice if legal protection is utmost importance and as you acquire more property and as you move to conventional and commercial loan product where they loan to the LLC, LLC might be more beneficial.

Bottom line is partnership is created if just do an handshake( both for tax and legal purpose) and  you can start buying a properties.  There is no need for paperwork. Doesn’t mean you should not get everything documented property.

Generally, there is no tax difference how you carry an investment ( not flips). The main concerns are legal and all the buyout and other complication that comes with the partnership.