Partnership with investors and how to do it

[Mrinal Parashar]

Two of my friends approached me and want to invest with me in real estate. I told them we can do a small deal and see how it goes.

The problem I have is- how much does an individual put in and how is the profit distributed? Also how is the equity distributed once the property is sold.

My wife manages my properties, so she will manage this property as well. She prefers an equal partnership in the deal instead of the 10% management fee. (without putting money down)

Any advice and help would be appreciated.

[Cody Lewis]

Usually the split depends on who's bringing what to the table. If you're bringing the finances and the management but they're doing the renovations, maybe you get a bigger split. It likely needs to be an open discussion between the three of you and you need it in a written legally binding agreement. I cannot stress enough the importance of getting things laid out legally, especially when dealing with friends/family.

[Curt Smith]

Hi All,  The more you search BP on partnerships the more you'll see old timers like me say stay away!  Some will say the worst decission they made, better off no deal then one with bad partners...   On and on.

I happen to completely agree with this.  LOL!!   OMG so many "friiends" and relatives are lost due to partnerships!   Here's some terse, high level thoughts.  You need to google;  how to pick partners for a business?   Read read read.   Some questions I suggest from  my own experience:

1) can you loose most of your investment?  They need to say well I suppose.  This is "mad" money for me.  If they blurt out "hell no" don't consider this person!!!   They will nag you day and night about how things are going.  They will make your life miserable (or shades of grey of course).

2) Have you done this type of busines before?  If no = don't do a parnership.  Yes yes I know this is chicken vs egg.  But I found the worst partners are ones who know nothing personallyy of the sacrifices, family time sacrifices needed to run an active real time even on Sundays (on occation) business.  You can NOT run a business with partners who will only respond to important email/sms a week later!!!   In fact that is good test.  Try emailing back and forth then SMS.  How fast do they respond.   Like my tenant screen, do they communicate Y/N?   So should your screen for a partner!   

Back to no experience;  Honest this was my biggest frustration for 5 long years, partners who at the onset where good folks, even hard working, but did not have the personal, family dynamic to set aside persona goals and needs to respond to some bussiness emergency!!!  I can't over state this mis-match between busness need and partners family priorities.  Its ok to put kids first, then put your cash into the stock market!!!   Its this black and white.

3) the LLC op agreement needs to provide for payment for who does the work. I strongly (strongly) disagree with your wife re not wanting to take 10% management fee. I suggest you deeply study "Syndication" and the layered performance fees the general partners (deal facilitators/managers) get!! They are not selfish or bad people. I can tell you there iis alot of work not just PM work, setting up deals, looking for deals, negotiating, due diligance inspection and blablablabla that 10% is the least I suggest you work for. The least.

4) Please consider;  Only offering debt and silent debt at that.  IE they have zero say in the business you just owe interest payments / mo or quarter or?   Or P&I.  They aren't included in any management!!!   You will be happiest via this scenario, I can assure you.  Ask around to old timers whove done partnerships???  Please do your educatioo first.  Pick your parters as lenders #1,  equity a distant #2,   last and worst scenario as full or partial business managers.  This should be your last scenario choice.

Best of luck to all.

[AJ Shepard]

Mrinal,

Will each of you play an active role in the deal? If that's the case and you're more likely going into a joint venture agreement or partnership, you might want to check out this link for reference:

https://www.biggerpockets.com/...

https://www.biggerpockets.com/...

Of course, as others have stated here, it's best to consult an attorney when dealing with a partnership. I wish you the best on your real estate journey!

[Bader Almutairi]

@Mrinal Parashar

Beside whats written above, I suggest you all agree on exitting terms in case one of you decide to back out of it in the middle of the planned investment.

[Chris Levarek]

@Mrinal Parashar A partnership can be structured any which way. It's what makes the deal work and is agreeable for both parties. That being said, capital is an easy onetime action but management is forever and ongoing. So make sure you structure equity in that regard is my recommendation.

Let me also mention, why not a fee and equity. Equity is great but, a fee is paid before the NOI. Meaning, you could eat first and thus be compensated for your efforts (always).

Now, I do not do this, I like equity splits, but having the fee can mean, you feel better compensated for managing forever...I do keep brining up the management is forever, because, you really don't want to put yourself in a management role where you are working for free. 

Or at the least, ensure there is an end goal, a credibility goal, or decent equity cut  if you will work for free.

[Mrinal Parashar]

@Cody Lewis thanks

[Mrinal Parashar]

@Curt Smith thanks. This is very helpful. Since I posted this question, I realized that there is some commitment or trust issues. They also want 15% return on their money because someone told them they could get that in Atlanta. We already moved to 10% property management fee.

I also started reading few books on syndication.

[Mrinal Parashar]

@Chris Levarek thanks . I see your point and totally agree with you.