My partner paid all cash- Set aside $ for vacancy?

Question

Hey BP Community!

My partner paid all cash for the buy-and-hold we are working. Without getting too far into details, he's providing capitol and I'm managing the deal and tenants. I have been estimating putting 5% towards vacancy funds, but that was before he decided to do all cash. We worked our arrangement out to where he gets the equivalent of a 20-year loan payment every month after base cash flow. Is there any reason now to put cash towards vacancy expenses that I'm overlooking? I was thinking yes, because it would make sense for him to still receive his "20-year loan" payment even if there is no tenant.

Thanks, Caleb.

Alyssa Paros · Answer

I would still include vacancy because, as you said, he will still be receiving a payment monthly and if you're not able to make said payment, there will be some animosity if it can't be paid. Best to be safe.

Caleb Anderson · Answer

@Thomas S. It is true, we probably could have done better with our pre-planning and drawing up the specifics of the partnership. Purchasing the property with all cash was a joint decision, and a change in our plans based on what the seller was doing and the condition of the house- problems that came up after we started pursuing the deal. No where did I say he didn't consult me. I didn't involve a lawyer, my partner and I do not need one as of yet, and we have a lawyer we like when we do need one. Up to this point I was planning on holding funds for vacancy expenses, but there were changes in the plan we made. That's why I came here to get some feedback on it- we are still constructing our deal and the details of that deal. Thank you for your response.

Thomas S. · Answer

Sounds like you and your partner did not draw up a detailed business partnership agreement through a lawyer before you jumped in. If this is the case I would strongly advise you do now before making any decisions.

You say he decided to buy all cash without consulting you, or at the very lease after you both decided to form a partnership. That is very poor business practice. Every detail needed to be agreed to in advance in writing. This situation does not look good regarding the pre planning of this partnership. Did you even involve a lawyer in th epartnership agreement.

To be asking now if a you should be setting up a vacancy fund is all wrong. Looks like you are going to get th eshort end of th estick in this partnership. Good luck.

Caleb Anderson · Answer

Thanks Alyssa! I'll be going with that.