Best way to structure a partnership???

3 Replies

I work in commercial real estate finance and have done some limited personal investing in rental properties.  In my humble opinion, there's arguably three key ingredients to successful real estate investing...time, cash and credit and maybe you throw in persistence as well.   Because of my day job and 2 year old, my biggest challenge is finding time...time to network, drive properties, analyze deals etc.  BUT I have some cash and solid credit.  So my cousin, who has a good bit of time as well as a homebuilding background, but little cash and no credit, is proposing we start investing together.   He's proposing we do some fix/flip or fix/rent deals on single family homes maybe some small multifamily.  I've used him several times for reno on my home as well as investment properties and he does a great job and I trust him.  My question is basically what is the best way to structure a partnership in this scenario?  I'll be financing the project but he'll be doing a lot of the work himself and managing the projects.  My inclination is to set a return target then split the profit after that hurdle is met.  I feel like I'd be taking on a lot more of the risk putting in the capital and taking on financing (if needed), but I'd be counting on him to get out there and find potential deals as well as do the rehab.  Curious to know what is typical and has worked for others in similar situation.  Would appreciate any thoughts or advice!

Originally posted by @Peter Decker :

I work in commercial real estate finance and have done some limited personal investing in rental properties.  In my humble opinion, there's arguably three key ingredients to successful real estate investing...time, cash and credit and maybe you throw in persistence as well.   Because of my day job and 2 year old, my biggest challenge is finding time...time to network, drive properties, analyze deals etc.  BUT I have some cash and solid credit.  So my cousin, who has a good bit of time as well as a homebuilding background, but little cash and no credit, is proposing we start investing together.   He's proposing we do some fix/flip or fix/rent deals on single family homes maybe some small multifamily.  I've used him several times for reno on my home as well as investment properties and he does a great job and I trust him.  My question is basically what is the best way to structure a partnership in this scenario?  I'll be financing the project but he'll be doing a lot of the work himself and managing the projects.  My inclination is to set a return target then split the profit after that hurdle is met.  I feel like I'd be taking on a lot more of the risk putting in the capital and taking on financing (if needed), but I'd be counting on him to get out there and find potential deals as well as do the rehab.  Curious to know what is typical and has worked for others in similar situation.  Would appreciate any thoughts or advice!

 I usually split 50/50 based on who is providing the financing and who is doing the work. With the new tax laws that might change a little. Generally a 50/50 is good though. Everything has to be in writing including ownership split, profit split, exit strategy and "oh my gosh, everything went wrong now what?" language.

To Mike S

Thank you for your replay. It was most helpful. Do you have examples and know where one could find examples of such partnership contracts?

Best,
JB

A good thing to do is to set up a LLC, and its function is to own and operate RE. Apply for S status (IRS) and in your operating agreement call out you and your other members. You will participate to the extent you allow and the shares you have. (50/50,whatever) Any gains or losses "pass through" to the individual on the back of your schedule E. This way its legit however nothing can keep you from having a good or bad experience and you will just have to find that out. Most good partners work together, provide things to the partnership that the other one can't.. After that its just character. Its sounds like you have a good start Peter Decker, GOOD LUCK

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