Partnership After All the Work is Done and Home is Making a profit

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Partnership After All the Work is Done and Home is Making a profit

Alicia Kuluris
Member since 2022 · 29 posts · 40 votes

Hello Everyone,

Greatly appreciate any thoughts on the matter.

We have a property in Big Bear, CA and it is making a small profit this year, but it is strictly an STR. We have decided to focus on Midterm rentals and have talked about selling it. We debate selling it all the time but we know homes in CA usually always increase in value and it is just a waiting game and we can't sell it right now and make a profit yet.

We have a friend looking to buy a mountain home to enjoy but also Airbnb it. They love our house and we recently talked about partnering somehow on this property, if possible. We have already done all the work from remodeling, furnishing to all the technical/software stuff. It is completely up and running.

Our pain points:

  • 1. Equity- The house doesn’t have enough equity to regain the money we put into it if we sell it right now.
  • 2. Cash- We could use cash right now. It is nothing urgent so we are not pressed but we could use it to have more cushion in savings.
  • 3. Risk Tolerance- We are no longer okay with the risk of having a bad snow season. We have savings for it but we don’t want to use up any more cash for that home.
  • 4. Guest- I no longer want to deal with guest regularly.

What they could bring to the table

  • 1. Cash – We wouldn’t even know how much to charge but cash is in the talks.
  • 2. Experience- he has connections and experience remodeling homes and can remodel the property and yard, if needed.
  • 3. Cover half the mortgage/utilities/insurance/taxes etc
  • 4. If this works well we could partner up in other deals

Is this beneficial for us to partner although the house is running and making a profit?

What if they want equity in the home, how much would you offer?

How do you charge for all the money and sweat equity you have already invested?

Is there anything else to consider?

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John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
2y

They can contribute half the purchase price, half any equity, half any money you've put into the property etc.

Then have an ironclad partner ship agreement.  I'd consult with an attorney on this.

Instead of a partnership why not just borry money? Could be an equity line against this or another property. 

Then you would capture all the future income and equity without having to share it.

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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    2y

    They can contribute half the purchase price, half any equity, half any money you've put into the property etc.

    Then have an ironclad partner ship agreement.  I'd consult with an attorney on this.

    Instead of a partnership why not just borry money? Could be an equity line against this or another property. 

    Then you would capture all the future income and equity without having to share it.

    3Reply
  • Mike GrudzienPro Member
    Lender · Eugene, OR · Member since 2019 · 2k+ posts · 1k+ votes
    2y

    I agree with @John Underwood
    Pencil out everything (costs, equity, etc.) to create a truly equal partner.
    When they and you agree on this amount and they pay their part, then you have an equal partner.
    Of course, in this process, definitely use an attorney.
    Mike

    2Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    2y

    Hey @Alicia Kuluris. So looking at the history of Big Bear, appreciation is there, but is spotty at best. I wouldn't count on serious appreciation over the next 5 years or so. Hard to tell of course.

    It sounds like you really want to get rid of it. I don't get number 2 of the gets. You have already remodeled the place so I am not sure why that is there.

    I kinda agree with @John Underwood about looking at getting a HELOC or something like that if you can manage it.

    The 2 things that jump out to me are the risk tolerance and dealing with the guests.

    Those 2 alone tell me you just need to sell it an get out. If you don't want to deal with guests in what is a customer service oriented business, then that means it is time to get out.

    Snow is a fact of life for those who own higher elevation, rural properties. What makes a "bad snow year"? No plowing thus no access? You can't get your property plowed out for access? Power out? Just wondering.

    2Reply
  • Ricky A.Pro Member
    Rental Property Investor · Chapel Hill, NC · Member since 2014 · 136 posts · 112 votes
    2y

    I agree with @John Underwood & @Mike Grudzien, and I would expand on documenting *EVERYTHING*.  Everything??  Everything!!

    COSTS: I would look at any-and-all things needed to run an STR including items that are often done by owners--for example, property management. There's value in property management, and you mention that you don't want to deal with guests regularly. You could determine FMV for property management and compensate the party providing it even if it's one of you. I think defining and compensating costs like these helps avoid resentment that can happen when a party has to do otherwise unpaid work or otherwise feels the workloads are unbalanced. You could even define quality metrics for some of these tasks to avoid a party doing subpar work (e.g., all guest questions must be answered within X hours/days).

    OWNER USE: What if one party wants to use the property during the highest demand time?  Is that fair?  Is it not?  Do you say that owner use is valued per the property's rate sheet for true-up during profit splitting?

    DECISIONS:  Will there be a majority owner?  If not, how will decisions be made?  Can one party make certain decisions, say under a certain threshold?  What decisions require consultation with both parties?  What happens if there's a tie.

    BUYOUT PROVISIONS:  What happens if one party wants out?  What happens if things aren't working?

    FINANCING:  Would they buy in under your existing financing or would you refinance the property?  Again, there is a value that should possibly be compensated if their names are not going on the mortgage but they are splitting ownership and other benefits (IMHO).

    There are probably a number of other easily overlooked items to consider.  

    1Reply
  • Andrew SteffensBusiness Member
    Tampa, FL · Member since 2022 · 4k+ posts · 3k+ votes
    2y

    I have partners on a few of my properties, and generally it has worked well for me.  That said I have some true nightmares.  This deal sounds like it could go 1 of 100 ways, so I think a meeting of the minds could hash out something that works for all parties.  Whatever you do, if you do partner, get a solid operating agreement signed that lays everything out.  Good luck!

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    2Reply
  • Dan Thomas
    Rental Property Investor · Bow, NH · Member since 2016 · 216 posts · 185 votes
    2y

    @Alicia Kuluris

    I know I'll get slammed for even mentioning this but what about an arbitrage arrangement? It is an str already so the points about excess wear and tear are irrelevant. You maintain the future equity and let him take the frustration of dealing with guests. He can use it as much or little as he wants and it wont cause friction. You mention he wants to use it....that can create friction in a partnership.

    From a partnership arrangement I dont see the benefit here. Sure you will get some cash but you give up equity. Equity is the whole reason you invest in CA. You have already done the hard part.

    1Reply
  • Braedon Page
    Member since 2024 · 31 posts · 16 votes
    1y
    Quote from @Michael Baum:

    If you don't want to deal with guests in what is a customer service oriented business, then that means it is time to get out.

    Absolutely incredible how many people seem to get blindsided by this when going into STR's.
    0Reply
  • Braedon Page
    Member since 2024 · 31 posts · 16 votes
    1y
    Quote from @Michael Baum:

    Snow is a fact of life for those who own higher elevation, rural properties. What makes a "bad snow year"? No plowing thus no access? You can't get your property plowed out for access? Power out? Just wondering.

    My guess would be that the STR is heavily reliant on people coming in for ski trips. Bad snow (no snow or less snow than normal) = less bookings and lower rates due to decreased ski demand.
    2Reply
  • Alicia Kuluris
    OP
    Member since 2022 · 29 posts · 40 votes
    1y
    Quote from @Michael Baum:

    Hey @Alicia Kuluris. So looking at the history of Big Bear, appreciation is there, but is spotty at best. I wouldn't count on serious appreciation over the next 5 years or so. Hard to tell of course.

    It sounds like you really want to get rid of it. I don't get number 2 of the gets. You have already remodeled the place so I am not sure why that is there.

    I kinda agree with @John Underwood about looking at getting a HELOC or something like that if you can manage it.

    The 2 things that jump out to me are the risk tolerance and dealing with the guests.

    Those 2 alone tell me you just need to sell it an get out. If you don't want to deal with guests in what is a customer service oriented business, then that means it is time to get out.

    Snow is a fact of life for those who own higher elevation, rural properties. What makes a "bad snow year"? No plowing thus no access? You can't get your property plowed out for access? Power out? Just wondering.


    Thank you for all the feedback. It's greatly appreciated. I would like to sell it or get a Heloc but there isn't enough equity right now so this is why we are considering a partnership.

    Bad season for us means shorter season or less people coming up during the season because of the lack of snow as most of our money is made in this season. Two or three years ago we had a storm that shut the entire season down and caused significant damage to people's property and streets.    

    0Reply
  • Alicia Kuluris
    OP
    Member since 2022 · 29 posts · 40 votes
    1y
    Quote from @John Underwood:

    They can contribute half the purchase price, half any equity, half any money you've put into the property etc.

    Then have an ironclad partner ship agreement.  I'd consult with an attorney on this.

    Instead of a partnership why not just borry money? Could be an equity line against this or another property. 

    Then you would capture all the future income and equity without having to share it.


     Thanks for all the feedback. It's greatly appreciated. This home just doesn't have enough equity for a Heloc at the moment and sharing the future equity is one of the things that has us going back and forth on our decision. 

    0Reply
  • Alicia Kuluris
    OP
    Member since 2022 · 29 posts · 40 votes
    1y
    Quote from @Mike Grudzien:

    I agree with @John Underwood
    Pencil out everything (costs, equity, etc.) to create a truly equal partner.
    When they and you agree on this amount and they pay their part, then you have an equal partner.
    Of course, in this process, definitely use an attorney.
    Mike


    Thanks for the feedback. It's greatly appreciated.
    0Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    1y

    Hey @Alicia Kuluris, thanks for the info on the snow.

    What about a HELOC on your primary home?

    0Reply
  • Alicia Kuluris
    OP
    Member since 2022 · 29 posts · 40 votes
    1y
    Quote from @Andrew Steffens:

    I have partners on a few of my properties, and generally it has worked well for me.  That said I have some true nightmares.  This deal sounds like it could go 1 of 100 ways, so I think a meeting of the minds could hash out something that works for all parties.  Whatever you do, if you do partner, get a solid operating agreement signed that lays everything out.  Good luck!

    Thanks for all the feedback on the operating agreement. I will definitely have one created if we move forward. 
    1Reply
  • Alicia Kuluris
    OP
    Member since 2022 · 29 posts · 40 votes
    1y
    Quote from @Dan Thomas:

    @Alicia Kuluris

    I know I'll get slammed for even mentioning this but what about an arbitrage arrangement? It is an str already so the points about excess wear and tear are irrelevant. You maintain the future equity and let him take the frustration of dealing with guests. He can use it as much or little as he wants and it wont cause friction. You mention he wants to use it....that can create friction in a partnership.

    From a partnership arrangement I dont see the benefit here. Sure you will get some cash but you give up equity. Equity is the whole reason you invest in CA. You have already done the hard part.


    Thanks for all the feedback. You definitely gave me somethings to think about. 
    0Reply
  • Alicia Kuluris
    OP
    Member since 2022 · 29 posts · 40 votes
    1y
    Quote from @Braedon Page:
    Quote from @Michael Baum:

    If you don't want to deal with guests in what is a customer service oriented business, then that means it is time to get out.

    Absolutely incredible how many people seem to get blindsided by this when going into STR's.

    We weren't blindsided by STR's being a service oriented business. That is one of the reasons we got in it. What changed was we had a baby and my priorities have now changed. Time is beyond precious now and if we want to launch we need to use our limited time wisely and STR no longer fits the live we want to lead.

    0Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    1y
    Quote from @Alicia Kuluris:
    Quote from @John Underwood:

    They can contribute half the purchase price, half any equity, half any money you've put into the property etc.

    Then have an ironclad partner ship agreement.  I'd consult with an attorney on this.

    Instead of a partnership why not just borry money? Could be an equity line against this or another property. 

    Then you would capture all the future income and equity without having to share it.


     Thanks for all the feedback. It's greatly appreciated. This home just doesn't have enough equity for a Heloc at the moment and sharing the future equity is one of the things that has us going back and forth on our decision. 


     Why worry about future equity, when you can get present day cash?

    Personal I beleive the less partners the better.

    0Reply
  • Alicia Kuluris
    OP
    Member since 2022 · 29 posts · 40 votes
    1y
    Quote from @Michael Baum:

    Hey @Alicia Kuluris, thanks for the info on the snow.

    What about a HELOC on your primary home?


    I do have a heloc on one of our properties but I am more looking for thoughts whether to partner or not based on all the work that has already been done by us and also by the property no longer fitting our strategy. I also saw the same thing you saw about the appreciation in Big Bear. It has appreciated since we bought it but it's not enough at the moment. Just typing this up made me think maybe we can sell them the entire business. Have you heard of people doing that? I have only bought properties and never sold or partnered. 

    0Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    1y
    Quote from @Alicia Kuluris:

    I do have a heloc on one of our properties but I am more looking for thoughts whether to partner or not based on all the work that has already been done by us and also by the property no longer fitting our strategy. I also saw the same thing you saw about the appreciation in Big Bear. It has appreciated since we bought it but it's not enough at the moment. Just typing this up made me think maybe we can sell them the entire business. Have you heard of people doing that? I have only bought properties and never sold or partnered. 

    So yes, I have seen folks sell a property as a business. The biggest issue is the house is worth what comps say it is. Just because it is a working STR doesn't mean the house itself has more value that another place that is comparable.

    I guess you need to ask yourself what the value of everything else is. Fully furnished has value but it is subjective. All the work you have done remodeling is reflected in the value of the house itself.

    What systems are in place to maintain the property? Not having to go find a good cleaner and handy person, proof of regular maintenance on the hard systems (A/C, Furnace etc) helps. What about a CPA on board who handles the taxes?

    In the end, the value of a single working STR is the place itself and not the rest IMHO. If someone is coming in with zero experience, then there would be some value in not having to furnish and track down personnel.

    It isn't easy to value a business like this unless it has 20 or so properties and a bunch of systems in place.

    How many bookings do you have for the rest of the year and into 2025? Those are a double edged swords. On one hand, it is nice to have some bookings to send forward, but the flip side the bookings could be crappy ones. It is hard to say.

    A lot of folks cancel all the bookings and have the guests re-book.
    0Reply
  • Joe S.Pro Member
    Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
    1y

    Very few partnerships survive after the honeymoon stage. There are some partnerships that are designed by nature to be short term, so there’s not as much to lose if things don’t turn out rosy. What you’re describing does not sound like a short term partnership/relationship.
    I felt like I needed to bring this up proceeded at your own discretion.
     
    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    1y

    I do not see what you have to lose with this partnership.  

    1) you are tired of dealing with guests.  Partner can or you can hire a pm

    2) property has not enough equity to heloc or sell at return but prospective partner is willing to buy into the partnership. 

    3) even if the partnership ends up being short lived, there is an opportunity for further appreciation in that span.

    4) you fear the risk of a poor season.   This partnership splits the risk.  Assuming 50% partner, you have halved your risk. 

    What is the downside?
    make sure a lawyer reviews the agreement.  

    Good luck

    1Reply
  • Joe S.Pro Member
    Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
    1y
    Quote from @Dan H.:

    I do not see what you have to lose with this partnership.  

    1) you are tired of dealing with guests.  Partner can or you can hire a pm

    2) property has not enough equity to heloc or sell at return but prospective partner is willing to buy into the partnership. 

    3) even if the partnership ends up being short lived, there is an opportunity for further appreciation in that span.

    4) you fear the risk of a poor season.   This partnership splits the risk.  Assuming 50% partner, you have halved your risk. 

    What is the downside?
    make sure a lawyer reviews the agreement.  

    Good luck

    Dan, how would you suggest she proceed with such a partnership? 
    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    1y
    Quote from @Joe S.:
    Quote from @Dan H.:

    I do not see what you have to lose with this partnership.  

    1) you are tired of dealing with guests.  Partner can or you can hire a pm

    2) property has not enough equity to heloc or sell at return but prospective partner is willing to buy into the partnership. 

    3) even if the partnership ends up being short lived, there is an opportunity for further appreciation in that span.

    4) you fear the risk of a poor season.   This partnership splits the risk.  Assuming 50% partner, you have halved your risk. 

    What is the downside?
    make sure a lawyer reviews the agreement.  

    Good luck

    Dan, how would you suggest she proceed with such a partnership? 

     If they can agree on current value then equity calculation is easy.  Assuming 50% ownership, new partner pays current owner 50% of the equity. Current owner indicates they can use some of the equity. They both get 50% of income and pay 50% of the costs.  The current owner reduces their risk. 

    For self visits, they can decide on what cost or no costs.  

    They also need to address exit options and items without a consensus opinion. 

    by the way, we have placed a handful of offers with what my wife refers to as her baby investor.  So far none have been accepted, but we have a a working agreement.  Our agreement has exit of one partner can buy at 8% discount if other partner wants to sell but is not obligated to buy.  If other partner does not choose to purchase the other partner interest the property is sold.  we also have free visits (my thought is partner will likely use it more (offers have been to Emerald coast and they live in Minnesota and I live in San Diego - who do you think will visit it more?) but they are likely to be working visits).  

    Good luck

    0Reply
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