How would you structure this deal?

Question

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)?

Richard Golding · Answer

Brenda

The neighbor aspect completely changes the leverage and it makes a standard buyout or finder fee impossible. If you live right next door you are not just managing an investment property you are literally policing your own property line and your own peace of mind.

Because the seller went to him first because of his local business footprint he holds the keys to the asset. But you hold the keys to the execution. Since you both have the cash to do this solo you need to structure a hard line between money and management. If you split the initial purchase and startup costs 50/50 you each own 50 percent equity. But because you are the one running the hospitality business day in and day out the LLC must pay you a 20 percent gross revenue management fee before a single dollar of profit or cash flow is split.

You also need to address that $70,000 CapEx bomb for the roof and windows upfront. Do not wait for the roof to leak to find out if he is willing to write a check. You should both put an extra $35,000 each into a dedicated reserve account at closing. If he refuses to fund the reserves upfront or balks at the management fee you need to step back. Let him buy it solo and then you can offer to co host it for a premium or just sit back and watch him try to manage a high maintenance short term rental next door while running his other businesses.

Christopher M. Wiley · Answer

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.
• 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.

• 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.

Todd Goedeke · Answer

@Brenda Reems It’s a bad deal. Stay away!

At the best you are estimating a 12% ConC return on an actively run business. It’s a mistake to own a cash flow business like a STVR for purpose of possible appreciation.

Brian Tulibaski · Answer

I’ve been involved in commercial real estate and investment properties for over 25 years throughout North Dakota and Minnesota, and my advice is usually pretty simple:

If both people can afford to buy the property on their own, avoid the partnership.  From what you described, it sounds like you would be handling the operations, guest communication, maintenance coordination, cleaners, and day to day issues while he mainly wants long term equity and appreciation.

That imbalance becomes a problem fast.  I’ve seen more real estate partnerships fail from resentment than from bad deals.

STRs also are not passive investments. Between guest turnover, pool maintenance, repairs, and unexpected issues, they can easily turn into a second job.  If your gut is telling you that you would rather own and control it yourself, there is probably a reason for that.

Best of luck!!

Brian Tulibaski, Fargo Commercial Realtor

Brenda Reems · Answer

this is my main concern. And from what is initially going on, it would be me holding the resentment. I dont necessarily want to buy this on my own. But, I want to be the one calling the shots. Even getting him to present the offer has been a struggle. While he is a successful business owner, he doesn’t run a business the way I would want to run it. He has always been the boss. I just don’t know how smoothly a partnership would go. If this was a slam dunk deal, I would just jump into it and “see how it goes”. But, this is not one of those cases.

Thank you for your response. If you have any slam dunk deals in Fargo, let me know. :)

Austin Moore · Answer

I’d be careful not to blur ownership and labor together.

If you both put in the same money, that is one conversation. But if you’re the one handling guests, cleaners, maintenance, pool issues, and most of the day-to-day work, that should be treated separately from equity.

Before moving forward, I’d want to ask who owns what, who gets paid for management, and how the future repairs get funded. That $70K in upcoming work is not a small detail.

Since you already prefer buying it on your own and both of you have the means to do it independently, I’d at least consider whether a clean finder fee makes more sense than a partnership.

STRs can be great, but they are not passive. If the first year or two may be flat or negative, I would not leave the “sweat” part vague. I’d get the structure reviewed by an attorney/CPA before putting money in.

Brenda Reems · Answer

When I say he presented it to me, it doesn't tell the whole story. I knew the home was going to be going to market. The owners spoke to him first as he owns the bar/restaurant in the area. I knew he was considering buying the place so I was not going to go to the owners and try to buy it out from under him. I actually live right next door to the home. There are a lot of complicated layers. So, a finders fee really isn't appropriate in this case. The only reason he wants to buy it as he sees the homes in this area appreciating and I agree.

How would you structure this deal?

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