Short Term Rental - To partner or not?

Question

Hi everyone! I'm looking to purchase my first investment property to be used as a short term rental.

In your opinion, should I partner with a friend? Or should I wait until I have enough capital to purchase the property on my own?

If you have had experience with partnerships on STRs, how were the profits, equity, management duties, etc. split?

Scott K. · Answer

In my opinion, never partner with a friend unless you're OK losing that friend by taking them to court. Crazier things have happened. Some people treat money like a number and some treat it very emotionally. You won't know until shit hits the fan.

If you must partner, there are better more professional ways to do so, like a hard money lender, etc.

I partner with my family to invest. They are passive owners who invested and own a percent of the business equal to their investment share. I run operations and take a percent of revenue off the top. We also have a percent profit share every quarter. Beyond that we reinvest everything into the business.

Mike Shemp · Answer

@Kiran Dhaliwal

I agree with @Rick Reeder.  If you are going to do it, make sure you have had all the difficult conversations up front.  One way to do it would be to list out every question you can think of, and then setup a series of calls/meetings with your partner to align on them all.  Once done, have an attorney help you with an operating agreement, identify any other issues/questions that need to be discussed, and make it all legal, signed, etc.

Going through the above process is a win-win no matter what.  If the partnership falls through because of the difficult conversations you are having, you just dodged a bullet.  If it goes through, you have a good operating agreement in place should issues come up.

Hope that helps.

Mike

Rick Reeder · Answer

I own two STRs through partnerships, and everyone is very happy.  The key, IMHO, is to do the hard work up front laying out the operating agreement and confirm that your goals are 100% aligned.  Do you want to buy and hold for long term passive income or would you like to harvest appreciation in 5 years?  What if someone gets a divorce?  Do you want to use the property occasionally or always have it on the market?  Will you use property management or self-manage?  Who will monitor the finances and/or work with the PM, Etc etc.  If you put everything in writing while you're still friends, you just refer to your agreement when the $hit hits the fan. :-)

Andrew Freed · Answer

@Kiran Dhaliwal - I agree with @Scott Kunz. Never partner with someone in the beginning. It's better to learn how to manage a property with your own funds and any mistakes you make are on you, no need to justify it to another party.

If you need to partner with someone, I recommend only doing it through a promissory note for the funds, e.g. debt. That is much easier to manage and you are only responsible for returns, nothing more.

I personally have partnered with multiple individuals on businesses outside of real estate and its very challenging for it not to ruin the relationship, especially when you both have different expectations. For instance, if we agree to commit 10 hours each week to management duties associated with a STR and I hold my end of the bargain, but my partner doesn't, I wouldn't be too happy with the arrangement.

As of now, I own 8 units @ 100% equity and I wouldn't have it any other way.

Short Term Rental - To partner or not?

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