Partner Strategy to for No-Income

4 Replies

I sat down with a friend of mine who flips houses it Pittsburgh but comes down to Florida where I live to visit occasionally and we were talking about the differences in real estate in both of these areas. He mentioned in conversation that SFH start at around 50k there while here the minimum is 100k. He has been flipping homes for over 5 years and has been successful but in conversation he said he doesn't own any long term rentals but would like to because he uses all the money to buy fix and flips. Also it is very hard for him to get loan because he doesn't show a steady income (all he does is fix and flip).

That got me thinking, I have a steady income but don't have the cash to buy more properties (bought two in the last year) at the moment, and he has cash but can't get a loan, what if we partner on a long term rental in Pittsburgh where he is familiar with the area. I know there are multiple ways to partner and I wanted to ask if this is a good idea and what other ways I could make this work? If I did approach him about this I would use an attorney to formalize everything and do my due diligence on his business model, but what else should to protect both of us? 

Justin

Definitely speak to an attorney that specializes in real estate and entity formation. I would recommend discussing with an attorney a LLC where you are each 50/50 partners and a strong operating agreement so you both have clearly defined roles and expectations. Here is who I have used in Pittsburgh for a similar type structure.

Philip J. Scolieri, Esq.

Scolieri Law Group, P.C.
1207 Fifth Avenue, Suite 200
Pittsburgh, PA 15219


Hey @Justin McFarland - I've done this a few times for investments in Florida, with both local and out of state investors, and each LLC has been structured a bit differently. Certainly talk to a competent attorney and have an idea of what you both want out of the partnership.

@Brandon Turner wrote a great post about things to consider as you form a partnership, it's definitely worth a read:

https://www.biggerpockets.com/renewsblog/partnersh...

Good luck!

Definitely talk to an attorney and write an iron-clad operating agreement, you need evrything in writing while everyone is still friends and can agree. I had one lawyer write up mine for my last partnership then had an uninvolved lawyer review, as did my partner.

Things to consider:

1. Under what conditions will you sell? Is there any way one partner will be able to force the other to sell?

2. How much money can one partner spend without the written consent of the other partner?

3. When the company needs more money will you take loans or each have to increase your investment equally to ensure 50/50 equity?

4. What happens if one of you dies or becomes incapacitated? This was super important for me: Make sure you understand the difference between the types of interests and rights that can be passed along to an heir, for example if your agreement is set up so that your partner's SO gets his share upon his death, does that person only have economic interest (just gets to collect their half of proceeds) or voting/decision rights? For me, I only allow my partners to pass on "economic shares" (I am NOT a lawyer, I might be calling this the wrong thing), so their spouse will still get the monetary benefits of the partnership but not have any decision-making power unless I vote them into the company, it prevents me from becoming parnters by default with someone who may not know/understand/value/think/share my investment philosophy

5. At what point and how will the company dissolve?

6. What ways are acceptable for you to settle disputes (Mediation, arbitration, court, etc)

7. Will either partner be the "boots on the gorund" i.e. managing day-to-day activities on their own time? If so, will this partner be compensated by the company and how?

8. What do you do with proceeds? Leave them in the accounts to build up cash or take regular disburements?

These are just some of the issues I was concerned with when having my own agreements drawn up. A competent lawyer should be able to bring up many more, and if you have a second lawyer review the agreement once written, now you have 2 sets of eyes and 2 sets of experiences  to think of things that everyone else may have missed.

I AM NOT A LAWYER, THIS IS JUST MY EXPERIENCE FROM FORMING MY OWN PARTNERSHIPS

@Megan Clancy or others, 

I am particularly interested in hearing what details people have included about dissolving a partnership/LLC.

I am wondering about specifics of one partner buying out the others if they 'want out early'. Would this be 'at full value'? What would be the time frame? What would happen if unable to obtain financing, etc?

I like the thoughts on the surviving heir NOT having voting rights but just economic rights. 

Thanks, Dan Dietz