How would you structure this deal?

[Brenda Reems]

I was presented with a potential opportunity to buy a home that would be used as a STR...or at least that would be the strategy we would start off with. He wants to buy the property but doesn't want to do any or much of the work. He is handy but has his hands full with his other businesses. So, he talked to me about possibly partnering up on it. I have not ran a STR. But, I do have a 4 plex that has 1 MTR. But, a STR would be something new.

With 25% down, we would need a minimum of $100,000 to purchase then another roughly $10,000 to get it up and running. It was used an STR during the summer months and they lived in it the rest of the months. They would leave a lot of the items but some items will need to be replaced. So, it would not be a full set up.

The home will eventually need some work. An out building needs a new roof, windows will need to be replaced soon, etc. I am estimating around $70,000 of repairs that will need to be done in the next few years.

He wants to be involved for potential equity. I do see this house appreciating in value due to its location and if we can get it for a decent price. He really just wants it to break even and keep for that potential equity. If I'm going to be doing a lot of work, I need it to cash flow along with that potential equity.

As far as for me, I would prefer buying this home on my own and not have a partner but he brought the deal to me. I would prefer to be able to do what I want with it. If I was buying this on my own, I would do the managing of the home, I would be doing the vast majority of the work for it. But, I would hire out some things such as yard maintenance and snow removal. I would hire a cleaner at times as well. I would also hire out some maintenance. It has a large above ground pool that is a huge selling factor the STR but also requires a lot of maintenance. I don't mind doing guest communications but I also don't want to have my life consumed with the home where I have to physically be present all the time.

I am quite certain the first year or maybe 2 this will not cash flow well and maybe even be negative. 

Both him and I have the financial means to buy on our own. So, it's not that we NEED 1 or the other to make the deal go through. I was thinking, if I was the one doing the majority of the work then he needs to bring more money to the table. Or do I charge a "management fee" and then we track our hours of work and pay ourselves a fee for the Individual work we do on the house? Or maybe he is just an equity partner (this has potential to cash flow $1,000/month or be negative $500/month)? 

[Christopher M. Wiley]

This is a classic "Capital vs. Sweat" partnership dilemma, but it is complicated by the fact that neither of you needs the other financially, and the asset is a high-maintenance Short Term Rental (STR) that requires immediate operational labor and deferred capital expenditures (CapEx).

Based on your Real Deal methodology, you need to structure this logically, separating the roles of Ownership (Equity)from Operations (Management).

Here is a breakdown of how to structure this partnership equitably, along with the risks you need to mitigate.

The "Capital vs. Sweat" Framework

Do not mix equity splits with labor. That is the fastest way to ruin a partnership, especially when one person is "handy but busy" and the other is doing the actual work.

Rule 1: Treat the LLC like a Business, and Yourselves like Employees.

• The Equity Split: Equity should reflect the financial risk taken. If you are splitting the $110,000 initial cost 50/50, you are 50/50 equity partners. If he wants 50% equity but wants you to do all the work "for free" because it will appreciate later, that is a bad deal for you.
• The Management Fee (The "Sweat" Compensation): Since you are running the STR (guest comms, pricing, coordinating cleaners/pool tech), you are acting as the Property Manager. Standard STR management fees range from 15% to 25% of Gross Revenue. The LLC (which you both own) must pay you this fee before any profit is calculated.

Rule 2: The "Sweat Equity" Buy-In If you want to own the asset but want him to bring more capital because he brought the deal, you can structure a disproportionate split.

• Example: He brings $80k (72%), you bring $30k (28%). But, because you are executing the rehab ($70k over a few years) and managing the asset, your Operating Agreement states the equity split is 50/50. His extra $50k upfront is his payment for your "sweat."

The Deferred CapEx Problem ($70k Repairs)

You mentioned $70k in upcoming repairs (roof, windows). This is the biggest hidden risk in the deal.

• The "Capital Call" Risk: If the property breaks even or loses money for the first two years, where does the $70k come from? You cannot fund it from cash flow.
• The Solution: You must establish a CapEx Reserve Strategy in your Operating Agreement now.
  • Option A (Fund it Now): You both agree to put an extra $35k each into the business bank account at closing to sit in a reserve for when those repairs hit.
  • Option B (The Capital Call Clause): You agree that when the roof fails, you both must write a check for $35k. If one partner refuses or cannot pay, their equity is diluted (reduced) according to a pre-agreed formula.

The STR Reality Check

You noted that you want this to cash flow, but he is fine with breaking even for appreciation. This is a fundamental misalignment of goals.

Furthermore, an STR with an above-ground pool that requires $70k in deferred maintenance is not a passive asset; it is a hospitality job. If you are projecting negative cash flow for two years, and you are the one doing the work, the appreciation (which is never guaranteed) is not paying you for your time today.

How to Propose the Deal (The "Real Deal" Approach)

You prefer to do this on your own. Since he brought you the deal, the professional move is to buy the lead from him or structure a clean division of labor.

The "Buy the Lead" Offer (Wholesale Fee): "I really like this asset, but given the heavy operational lift of an STR and the $70k in upcoming CapEx, a partnership is going to get messy. Since we both have the capital, I'd prefer to buy this solo. Because you brought me the lead, I'll pay you a $5,000 'finder's fee' out of my pocket at closing if I take it."

The Clean Partnership Offer: "If we partner, we need to separate ownership from operations. We split the initial $110k 50/50, and we both own 50% equity. However, since I will be acting as the Property Manager, the LLC will pay me a 20% Gross Revenue management fee. Also, we both need to commit in writing to funding the $70k in upcoming repairs 50/50 when they are needed. If that works, let's draft the Operating Agreement."

If he balks at paying you a management fee or refuses to commit to future capital calls, walk away. A "free" deal from a friend is the most expensive deal you can buy if the terms aren't right.