Best way to structure a real estate, SFH rental, deal

6 Replies

I am in a unique situation in which prospective tenants reach out to me to find them a place to live and rent. More unique than just that but for the sake of the conversation and questions I need answers on, the above summary should suffice. We have 6 cash flowing properties and my liquidity is quickly drying up. My father has noticed my success and wants a piece of the action.

With that being said, from a financing perspective we need to finance them in our personal names in order to utilize the type of financing we require to make these deals work. We both agree we want some type of contract between us outlining the details of our operation. Figured I would check here to see if there are known resources before we go the lawyer route. Would like to structure it 51% me 49% him to ensure all final decisions go thru me. Be it repairs, financing, etc. any thoughts? Happy to share more info if needed. Lmk what y’all think. Thanks in advance

@Kevin Mitchell

Your description left out many critical pieces:

  • I assume by "we have 6 cash flowing properties" you meant - we found 6 properties that we could buy and then rent to those "prospective tenants." If not, then please explain.
  • I assume by "wants a piece of the action" you mean that neither one of you is bringing much cash to the table and plan to use your respective credits (or possibly just your father's) to secure long-term funding for these 6 properties. If not, please explain.
  • No idea what you meant by "my success."
  • No idea how you're planning to divide financial responsibilities for this deal.

Structuring is secondary to the business plan, so we need to start with your plan.

And I can't omit a warning that you're probably going to ignore and later regret ignoring it: don't do business with family and friends.

@Michael Plaks

I feel so attacked by Mr Plaks haha

Additional info: by “we” I meant my wife and I. We have 6 cash flowing properties in our name and running like a German train station. They are quite successful via the cash flow multiples, lease terms, etc. Given my unique-tenants demand for me and my wife as a landlord the opportunity is too good not to move forward with the current requests for addition rental homes.

I bring an MBA, banking background, real estate experience, cash flow and some liquidity, etc. to the table vs my father bringing additional liquidity and capital. I need his capital.

I’m well aware of the horror stories about working with friends and families but I’m also aware of first hand success. The intent is to lay it all out of the table, upfront, and wrap it all up on paper with a nice bow. He knows I am bringing the tremendous opportunity and experience and he knows he is bringing the capital for which I currently need. We have 3 rentals to buy ASAP and 1 more on the docket for early next year; cue the unique situation.

My wife and I can do house #1 by ourselves with the capital we currently have. However, that will limit our ability to do houses 2 and 3. If we do house #1 and skip 2&3, then we could fund house #4 by ourselves. In order to continue to meet the demand and my commitment to my prospective tenants, I would rather have 51% of 4 houses vs. 100% of 2 houses, because there will be more after these initial 4 houses late next year.

Does this help? I'm simply looking for suggestions on the proper legal forms to research prior to meeting with a lawyer. Want to structure all aspects of the agreement between my wife and I (party #1) and my dad (party #2) at 51% us and 49% him. For example, party #1 will be liable for 51% of the debt, receive 51% of cash flow, pay for 51% of repairs etc. Probably most important piece is the decision making piece. My 51% should ensure that all final decisions involving business decisions should be approved by me. We will not have an LLC and will finance in our personal names together, in order to qualify for the type of financing with my current bank that will work for these deal

@Kevin Mitchell

Let the attack continue, shall we? Or rather feelings of being attacked? There're no safe zones on BP that I'm aware of. :) Shots fired in the most peaceful way possible, though.

If you compare your initial post with your follow-up, you will notice how much was withheld. Now your plan makes sense. Let me point out what I see as potential issues with your strategic thinking. You found some favorable source of funding for your next 4 properties, and you can't qualify by yourselves. So you decided to give up half of the pie in order to not lose the entire pie. 

First issue. You conceded that you could fund properties #1 and #4 yourself. So you could either own 100% of 2 houses out of 4 or you could own 50% of all 4 houses. Seems that you have HALF of the pie either way, doesn't it? Your wealth opportunities are basically identical both ways. But 100% of 2 houses eliminates all the hassles and costs of a partnership, all the challenges of mixing business with family, and half of the maintenance headaches. Sounds like a winner to me.

The only reason to choose 50% of 4 houses over 100% of 2 would be to help your father get his piece of the pie. Which is a NON-business reason. I'm not trying to tell you how to make your decisions, it is your business and your family. I just urge you to be honest with yourself as to why you're making decisions. Would you make the same choice (50% of 4 v. 100% of 2) with an unrelated business partner? 

Second issue. There're 50 ways to leave your lover (google Paul Simon), and at least that many ways to finance properties. You could explore alternative funding sources. While it will possibly eat into your margins, it will allow you to own 100% of everything. 100% of a slightly less profitable business beats 50% of a slightly more profitable business, in my non-MBA opinion. Especially when the slightly less profitable business is TWICE the size.

Again, seemingly the deciding factor here is helping your Dad. Nothing wrong with it. As a father of adult boys myself, I can appreciate it. As a business advisor, I will again suggest absolute clarity of your decision-making factors.

PS. I would probably decline becoming a business partner of my own sons, and I suspect so would they.

@Kevin Mitchell

As to the process of implementing your plan. 

Route 1. Since your dad will not be involved in managing the operation, he could simply be a secured private lender. In exchange for his capital, he will receive guaranteed income stream, he will not be responsible for contingencies or (gulp) financial losses if something goes wrong, and he will not be exposed to legal liability as a landlord. He has more security, none of the headaches, but he has less upside potential (which could be addressed differently if you desire to reward him with a share of future appreciation).

Route 2. 51/49 partnership. Thumbs up on considering 51/49! Yes, controlling the decision making and avoiding deadlocks is crucial. Highly recommend: pay yourself for managing the operation before splitting the profits 51/49.

You can guess which route I prefer.

I cannot recommend anything other than an attorney experienced with structuring these deals, either of the two routes. An ironclad agreement spelling out all possible what-ifs is absolutely essential. More so with the partnership. And it has to be customized. Boilerplate legal documents are only good for getting boiled.

Good luck!

Originally posted by @Kevin Mitchell
:

@Michael Plaks You really have me re-thinking this and for all the info, thank you. Mind sharing other financing options so maybe I could do all these deals with just my wife and I? I’m not familiar with private lending or where to start looking

There is a forum here on BP dedicated to financing:
https://www.biggerpockets.com/forums/50-creative-real-estate-financing

Also, multiple blog posts and podcast episodes. And several books on private lending are available on Amazon. Good luck.