Need advice, partnering vs. investor to purchase tri-plex?

Question

I am about to put in an offer on a tri-plex for short term rentals. I have a contractor who might be interested in investing or partnering in some capacity... contributing 20k toward the down payment and about 25k in repairs for a total of 45k upfront. Assumption is that I carry the mortgage, 595k and also pay about 80k for the rest of the down payment, FF&E and interior updates.

The options are A) treat the contribution as a loan, with 8% interest, or B) Profit sharing of a certain percent, or C) We partner up with weighted shares... like 20/80 with the understanding that he will provide ongoing maintenance.

Are there other options, what has worked well for others? And what kind of contract would you use to solidify? I have done a couple of deals, but this would be my first with an outside investor / partner. Thanks!

Account Closed · Answer

Emily, those are all viable options.  The partner option may work better if the two of you can reach agreement on the terms.  Based on him putting in $45K and you putting in $80K, the straight percentage would be 36%/64%.  Cleanest form would be to create an LLC or LP and let the entity be the borrower.  Each of you would be liable for the loan.  If only one of you is able to guaranty the loan, there should be an adjustment in the splits for that.  Likewise, if he is providing on-going maintenance, there needs to be compensation for that as well.

If you bring in passive investors, you could set it up where the equity gets a base return (say 10%) before splitting profits, then you, as sponsor, would take 40% of the remaining profit and the investors take the other 60% (in addition to their return of investment and preferred return).

Depending on Oregon law, you may find an LLC to be better than an LP (or some other structure).  I would settle on the business terms first, then engage an attorney to help you decide the best legal structure.

Dan Bryskin · Answer

@Emily Refi, partnerships are like a marriage, some are even more consequential.  I would not treat entering in one lightly, especially if you have an option to try it out first ... Treat money as a loan with understanding if everything is working out - it may become a partnership. Good luck.

Emily Refi · Answer

Very good advice @Jeff Ledyard  - thank you so much!

Emily Refi · Answer

Hi Dustin, no I didn’t get replies about this. I’m meeting with the contractor this week actually (this deal is moving at a very slow, “coastal” pace) ;)

Dustin Maxwell · Answer

Did anyone reply to your privately? I like how you listed your options etc. What did you end up doing?