Partnerships and joint ventures

8 Replies

I'm looking to do partnerships in which I have control and give returns to investors. But my real estate strategy is to use it in the buy and hold space.

So here is what I’m thinking...if I buy a fourplex for 250k, the dp is about 67-70k...if I get an investor to give me that money, through an llc or whatever, how can I structure the deal?

I'm thinking like 8.5% interest only until I have enough equity and room to pull out that 70k and payoff investor. But that might take 8 years, so who is going to want to do that?

Is it best just to use my own money and go slower?

It's going to be tough to do that deal. Someone is going to have to sign on the line for that loan and qualify as well. You might want to look into strategies to add value to properties and buy at a steeper discount so you can refinance. 

@Reggie Maggard how we have done deals like that is a bit different that what you are thinking.

We DO use an LLC, but the Private Money Partner becomes a PARTNER, not a LENDER. They provide ALL of the down payment plus a small reserve of 20 -30% (example is 60K on our most recent purchase of a 260K 4-Plex with a 55K down payment and closing costs) and we do ALL of the finding, purchasing, rehab management if needed and ongoing PM and business management.

We are 50-50 partners in the LLC and split all cash flow and equity growth. When we do a cash out refi (if at all) they would have the option to be 'cashed out' by getting ALL of their investment back and then splitting things 50-50, or leaving ALL of their investment in and we would split things 50-50 from the refi and they would get their investment back at time of eventual sale.

The point where we could refi and pay them off on equity growth would likely be 10-12 years from our projections.

We DO have to 'give up' 50% of a deal this way, but we also make a great return for our time and essentially have people  'lined up' to partner up with us on these as fast as we can find deals that fit the method and numbers.

Dan Dietz

There is certainly many different ways to do this, but here's one of my favorites. We buy a property that may need some rehab before its rented out and I don't like to tie up my cash long term, so I bring in a financial friends IRA to put up the funds. They are going to receive an Option for (X % ) of the equity and or cash flow to be paid at a future date. Here's an example...... this week, I bought a house for 100k. I paid the seller 15k cash, took over her 1st mortgage of 70k subject to, and she is carrying a 2nd mortgage for 15k at 0% with $200 payments until paid in full. The house needs 5k in updating. So, my friends IRA will put up 20k for 50% of the equity at the time we sell, whenever I decide to sell, in the future. He will be protected by an Option contract. I keep all of the monthly cashflow in this deal and I have zero cash out of pocket. When we put a financial calculator to the deal, my friends IRA will make a projected 27% ROI. Since his money is not a loan, I don't have to pay him a monthly payment. As I said, there's many ways to deal structure. You just need to be intentional when you do it. In this example, my friends IRA does not get any benefits from ownership or depreciation, so we keep those benefits. He does benefit greatly from the zero percent 2nd mortgage as principal reduction increases equity. Hope this opens up your thought process a little.

@Daniel Dietz

Hey thanks for the insight.

I have a couple of questions...

1. In the partnership are they limited and your general? I know you said 50/50 but how are the decisions made?

2. How did you get away with a 20% down payment (instead of 25%)?

3. In your partnership, the partner understands it may be 12 years before they get their cash? I would think the partners would have a fit if they need their cash day in 3 years or something.

Thanks

@Reggie Maggard

I’ve always had a hard time swallowing some of the one sided, low and just plain bad deals some “passive investors” are doing. But hey, it a free market.

Our investors receive 90+ % of the return. We invest along side them at the same terms. Our “promote” is less than a 10% hit. But we do bigger deals ($1-4 million), and being accredited investors our investors have a much wider and better choice of deals to invest in.

These "informal", i.e. not SEC "safe haven" offerings always work out when the market is going up. In a recession is when the outside investors begin asking questions, engage attorneys, and try to find a way to hang responsibility for their loses on someone else. And those "informal" passive partnerships leave the sponsor without a "statutory" defense from a lawsuit. And if the plaintiffs attorney can get a jury to agree on fraud, either actual or constructive, then neither bankruptcy nor asset exemptions will help the defendant keep his net worth.

Originally posted by @Reggie Maggard :

@Daniel Dietz

Hey thanks for the insight.

I have a couple of questions...

1. In the partnership are they limited and your general? I know you said 50/50 but how are the decisions made?

In this type we need to make unanimous decisions to change from the operating agreement, so it better be spelled out pretty well! ;-) We do have an 'opt out' if one side or the other REALLY needs to get out early. In my other partnerships where me and primarily two others all ponied up equal equity for some things we have a simple 2/3 majority, and for major things like buying or selling proprieties, borrowing funds or doing an eviction we need unanimous consent.

2. How did you get away with a 20% down payment (instead of 25%)?

These are with Portfolio/Commercial Loans held at a local Credit Union. That is there policy as long as the numbers make sense cash flow wise. They require a 1.1 DSCR, we choose to not buy anything with under a 1.2 DSCR to give us some cushion.

3. In your partnership, the partner understands it may be 12 years before they get their cash? I would think the partners would have a fit if they need their cash day in 3 years or something.

We DO have an early opt out for either of us, but if we sell early we all take a hit because of realtor fees eating up appreciation and debt paydown. They do know going in that we are planning on at least 10 years. We also let it be know IF there is enough equity growth before that in which we could cash them out we would be happy to do so. We intentionally look for Private Money Partners that we know with 95% certainty WONT need thier principal back before then. Think folks with large net worth, people with large retirement accounts where our partnership is say less than 25% of it and the like. There is quarterly cash flow, but it is relatively small to the equity build over time.