Buying a Small Apartment and Have Questions
Investor · Yorba Linda, CA · Member since 2016 · 114 posts · 32 votes
Ok, so I am about to buy a small Apartment Building and am looking to partner with a friend on it. But I have a few questions that I would to get some advice on:
- Does it make sense if I am taking on a partner that we just split the ownership of the home by the percentage of the downpayment each of us put into the deal?
- If the above is true than what is the best way to go about that? Open a LLC and split up ownership that way or do tenant in common?
- If the above is true then how do you decide selling rights? By majority owner? Buy out of either owner possible by majority own approval and price determined by appraisal?
- Any tips on what documents we need to make this happen? If it is a LLC that is easy enough but if not what docs should we use?
Thank you BP family. This will be my first partnership and first commercial deal so I am open to all other thoughts.
Jorge
#let-the-feedback-begin
@Jorge Barboza Jr.
Tom is right, determine each player's roles and contributions, including time, talents, and money.
You may even decide to have one party active and the other passive.
Most of all, be sure to establish the "what ifs" should all not go well, like vacancies, additional expenses, costs, and losses, disagreements among the partners, wishes to sell or liquidate when the other party does not, family succession, etc.
Everybody gets along great when times are great and it's a brand new venture.
Plan for worse case scenarios to both party's satisfaction before anything happens.
Good luck!
This is my next endeavor as well. Hoping to find some good info!
Congratulations on finding a suitable investment property! That's very exciting. I just turned down an 8 plex, which was frustrating, but the numbers didn't support it...enough about me already.
Before thinking about down payments and ownership percentages, I would consider what role each of you will play with regard to management, repairs, etc. Time is money and if one partner is always on the phone getting bids, rent collecting, etc and the other is completely passive it will put a strain on the partnership. I would get all the responsibilities and strategy lined out ahead of time and then consider the money and value that each partner is bringing to the table.
I'll let more intelligent and experienced people discuss the LLC issue. BTW, they will want to know the property location (state).
Good luck to you!
TJ
@Jorge Barboza Jr.
Tom is right, determine each player's roles and contributions, including time, talents, and money.
You may even decide to have one party active and the other passive.
Most of all, be sure to establish the "what ifs" should all not go well, like vacancies, additional expenses, costs, and losses, disagreements among the partners, wishes to sell or liquidate when the other party does not, family succession, etc.
Everybody gets along great when times are great and it's a brand new venture.
Plan for worse case scenarios to both party's satisfaction before anything happens.
Good luck!
Oh man! This is what I love about BP INSTANT FEEDBACK. Ok here are my thoughts to you gifts you just gave me. Please tell me what you think.
The property is in California so theres that. It is close to where I work but even if I move further still drivable if needed. I will have property management and plan to be the primary contact person and my partner will be second. Now my partner is actually several partners but really the group has given all rights to invest to one person and that is the one I will be dealing with. I know him and have come close to partnering with him before but on businesses not real estate.
My thought on right to sell was who ever has majority stake has the approval to sell or approval for buyout and buyout would be based on appraisal.
Expenses will be spilt by percent ownership and succession will be based on what way we decide to take ownership. If LLC then that will be a little more tricky and need to be spelled out. If it is tenant in common I believe that has it already spelled out.
Talents wise, I have more knowledge on real estate and systems and they have more knowledge on small business ventures.
I was originally thinking I should get an automatic 5% more equity because of finding the deal and being the primary but I would really like to work several deals with this Investors so I was going to discount that. What do you all think about that?
@Jorge Barboza Jr. If you think you deserve more (whether it is equity or anything else), it helps to spell out the roles and responsibilities to clearly show you've got more. It will help you ask for more as well. Besides your operating agreement needs this roles' breakdown anyway.
WOw! thank you everyone one. I appreciate all the help.
Thank you @Alina Trigub
Thank you @Kevin B.
Thank you @Tim Jones
Thank you @Josh Sellers
And again, i am open to more feedback and advice.
Jorge
An LLC is a good vehicle for many businesses, it might be applicable to RE, I know it's been done quite a bit.
Consult with a Lawyer to make sure everyone is protected and you are covered for these cases. You can/should propose that you get the majority if you were the finder. Or at the very least, you could get a single tie-breaker stock, you don't want to butt-heads.
Everything else here is spot on. If you're both bringing in the same things, closer to 50-50 split is fine. If you're partner(s) are just bringing money, that's not quite everything.
Ideally you want to have a partnership that looks good to you if the roles are reversed.
Also, beware, if your partners outnumber you, that means they have a potentially stronger network than you. If you trust everyone in this partnership, that's great, but these are all potential wildcards that you can deal with.
Congrats on finding something, I hope it works well for you.
You could do this several different ways. And it depends on a lot of different variables as well. Is your partner a family member or other trusted long-time friend? Will the properties have mortgages? Will you be performing equal duties? Putting in equal amounts of money? Are you worried about the stability of your partner in terms of marriage or finances? What about liability concerns from tenants or creditors?
Having a formal entity allows you to have a written agreement laying out all the decisions both of you will make and the roles you will play with regard to the properties. It will describe which actions will need both of your approvals and which actions one partner can do on behalf of the entity. For instance, do you want to restrict your partner from being able to encumber the properties? Is there a dollar amount of expenditures you want to require unanimous approval? You could also draft a sort of tenants in common agreement if you wanted to avoid a formal entity, but that gives you no liability protection. If you are going to have debts attached to the property, you will want to make sure to watch out for any due on transfer clauses, or be ready to personally guarantee any loans taken out in the name of the entity. Will you also be using the entity as a property manager for other properties or want an entity name for tenants to be able to write rent checks out to?
If one partner puts in more money than the other, you could change ownership interests, you could treat it as a loan, you could reduce income/profits from the non-contributing partner until the contributing partner is paid, etc.
You will want to discuss with each other who will be doing what management functions and whether that is worth anything to you both. If only one person is doing all the work, do they deserve a management fee before profits are split? How will you calculate such a fee?
What if one partner wants out of the partnership? Can they transfer it or sell it? Will you require the other partner to buy him out? What about a first right of refusal? Can it be transferred to the partner's spouse (especially with California being a community property state)? What if one partner gets divorced or married? Can children have an ownership stake? What if one goes bankrupt?
What about in the event of disagreements? What decisions will require unanimous approval versus one partner can act? Will you require expenditures over a certain dollar amount to be approved by both partners?
Also just a caution that if one partner is putting in sweat equity/services for his interest, the accounting for it gets fairly complex.
If you need lawyer or accountant names in San Diego, let me know. Good luck!
*This post does not create an attorney-client or CPA-client relationship. The information in this post is not to be relied upon and readers are advised to seek professional advice.
@Katie L.! You are awesome! Thank you for all the details, I just PM’d you.