How to Structure Short Term Rental Partnerships?

Question

Hello!

I am writing up a business plan for short term rentals in a specific area and trying to figure out how best to structure capital partnerships. I am pitching the idea to family first, so I definitely want to be more than fair and make it a win-win for everyone involved.

Currently I am thinking of splitting 70% of cashflow with investors proportional to their investment. Along with 30% equity split likewise.

I will be managing the property and living in an ADU on-site initially (it's my first deal).

Any advice would be appreciated! Including advice on what books/resources I can go to to figure it out myself.

Thanks in advance!

John Underwood · Answer

Pay them interest and keep 100% ownership.

John Flanagan · Answer

Hans-

When it comes to partnerships there is no singularly right way to do it.  The one thing I would say is to put yourself in the shoes of the individuals you're going to talk to about investing and ask, what do I get out of this?  While you put certain numbers out there for % splits on cash flow and equity if I were an investor my question to you would be, what are you bringing to the table? Are you bringing capital to the table for down payment and/or handling the financing? You mention living in an ADU for a period of time which, not knowing the property, will eat in to cash flow potential.  My assumption is you're handling the property management but keep in mind that is a service anyone can get for a cost that doesn't cost them equity in a property.  How steady are short term rentals in your location and if you have a bad month who covers the costs? Or, god forbid, the municipality you invest in decides one day to no longer allow short term rentals (which has happened to me), can you find a long term renter and does that financially make sense?

I hope this isn't coming off as too negative but I'm trying to highlight certain questions that are more than likely bound to pop up.  Remember when dealing with investors, especially family, you have to put them first.  Instead of sharing cash flow proceeds I would recommend offering a guaranteed IRR (for which you are personally responsible) and potentially a cut of the equity in the property.  Rates are still historically low so the IRR shouldn't be outrageous but it also guarantees to your investor that regardless of cash flow they are going to make a return every month.  This also can benefit you by not requiring yourself to give up excess cash flow if the rentals are doing well.  Hope this helps!

Jefferson Brown · Answer

Hey @Hans Alverson this is something we do quite a bit of so Id be happy to share what I know.  This post could get very long though so I'll just keep the most important stuff in this thread.

First and foremost, this is very delicate stuff legally.  Anytime you share ownership of a property you have two options.

1.) Put each investor on title or

2.) Have an attorney write up a PPM (Private placement memorandum).

Unfortunately you can't really put more than a couple people on title so you're probably going to have to go with the PPM route if you're going to raise capital from lots of friends and family.  What you're trying to do is technically a "security" by definition of the SEC and they regulate it. Attorney's usually charge anywhere from $20-50K to write up a PPM.  If you try to sell percentages or shares of the property without this you could go to jail.  I know that sounds harsh but securities law is the only kind of law that does not give you grace for naivety.  Meaning if you kill someone by accident your punishment is less severe than if you do it on purpose but that is not the case with securities law.

I hate to tell people this because its such a buzz kill but I can tell you it IS possible if you do it right.  You just need to think big in order to make the legal costs worth it.  Let me know if you have more questions about this route.

The other option is to do like mentioned above and offer some kind of loan.  That avoids the whole securities issue.

Jason Stoltzfus · Answer

I don't have a comprehensive answer, just a data point... Avery Carl mentions one type of partnership in her book Short-Term Rental, Long-Term Wealth.

The gist of it is that there are two partners; one brings the cash, and one brings "sweat". You get some sort of reasonable equity split (50/50?). The "sweat" partner essentially then "owes" the cash partner their share of the initial cost like a loan, and that gets paid down (out of STR profits?) until the cash partner recoups that money, at which point it's an equal partnership.EDIT: In case it wasn't clear, the "sweat" partner is also doing the bulk of the management work in this scenario as well. It's kind of like saying "I don't have the money now, but I'll work hard to repay my portion of the investment over time if you can front 100% of the money now."

Something like that... I have no experience with this... just passing it along.

A quick search of the boards will uncover a number of other posts asking the same question as well.

Scott Wolf · Answer

@Hans Alverson, @John Underwood hits the nail on the head.  If you can keep your partners on the debt side of the equation, you will end up with greater profits.  Good luck!

Kalo (Kyle) Atanasoff · Answer

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How to Structure Short Term Rental Partnerships?

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