All Forum Posts by: Todd Heitner

Hi Dan,

I can't help too much with the specific numbers to use, but I do have a couple things for you to consider.

First off, make sure whatever you agree upon gets put in writing and you both sign it.  You may already be planning to, but I just thought it was worth mentioning.  Sometimes friends tend to not put things in writing because they think it means they don't trust each other or something.  But there's nothing that can kill a friendship quicker than a bad business deal.

It's easy to forget some of the details you had agreed to verbally a year or more down the road, or to think that you agreed to something when you really hadn't.  Putting it in writing will help to avoid any misunderstandings down the road.

Second, if I understand correctly, you're each putting 50% in, and I assume sharing the income 50/50.  You'll be handling certain tasks related to management yourselves, with you managing the property itself and your friend handling the accounting.  Then it sounds like you're going to be paying each other for the services.

What you're doing is starting a business, so I would think you'd have a bank account where funds related to the property (and any future properties) are coming and going - income and expenses.  Money coming in from either rent or selling the property are income, and things like managing the property and paying an accountant are expenses.  I would think that, rather than coming out of either of your personal profits, those are expenses the business itself has, so they would be paid from the business account, not from either of you personally.  Whatever is left over after expenses are paid is profit, and you'd divide that 50/50.

I'm not sure if what I'm describing is different from what you had in mind or not, but I think it's different, from what I was understanding.

If so, imagine that, rather than the two of you doing those tasks, you're paying other people to do them.  You're paying someone to manage the property and to handle your taxes at the end of the year.  Those are just expenses the business has, so the business would pay them, not any of the partners.  In this case, the two of you will be doing certain things and getting paid to do them.  If you're paid out of pocket rather than from the business, one of you will get the shorter end of the stick because the fees aren't going to be equal.  And what if one of you gets too busy with other things and doesn't have time to do those items, or doesn't want to do them anymore?  It wouldn't be fair for the other friend to be stuck paying those fees.

Let me give you an example with some made-up numbers.

Let's say your property produces 10,000 in rental income for the year.  Going the route you proposed, you'd each get half of that, or 5,000 each.  Let's say you decide property management fees are worth $1,500/year, and the tax filing duties are worth $500/year.  Let's see how this breaks down:

Dan gets 5,000, plus 1,500 for managing the property, minus 500 for CPA = $6,000 income

Friend gets 5,000, plus 500 as CPA, minus 1,500 for property manager = $4,000 income

Obviously in this scenario you'd get more money, but it's fair that you get more because you did more work.  But it's where the money is coming from and the amount that's the problem.  It's that it's coming out of your friend's share rather than the business' expense account.

Think about it this way.  You're doing $1,500 worth of work and your friend is doing $500 worth of work, so that's a difference of $1,000.  But the difference between your income and his income is $2,000.  Clearly, it's not balanced.

Let's look at the same scenario, but we'll let the business pay the expenses rather than you individually.

10,000 rental income, minus $2,000 expenses ($1,500 to property manager, $500 to CPA) = $8,000

That means $4,000 each.

Dan gets $4,000 + 1,500 for property management = $5,500 income

Friend gets $4,000 + $500 as CPA = $4,500 income

As you can see, even though you're each getting paid the same amount in both scenarios for your services, the second scenario is more fair.  The bigger the gap between the cost of the two services, the more unfair it will become.  The only way it would be fair is if the services had exactly the same value, which is unlikely.

I hope this helps.

Todd

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@Bill Gulley

I appreciate your concern and feedback.  I certainly wouldn't want to do anything that would cause anyone to get hurt or get into trouble.

A rent-to-own, or lease option, does not have to include rent credits.  Obviously now they should not.  But even before the Dodd-Frank stuff, not all investors used rent credits.  That was one possible way to do things, but not the only way.  Investors are still utilizing rent-to-own legally without rent credits.  The rent-to-own buyer page we offer does not mention rent credits.

Keep in mind, I'm not teaching people how to invest in real estate, I'm just providing pages that investors have told me they want.  No one is going to start doing lease options or wholesaling just because they have an option to use a page on their website about those things.  They couldn't.  They wouldn't know how to do the transaction.  They would have to get educated on how to do that.  Whoever is teaching them should teach them how to do things legally or at least to check what their local laws are.

Since lease options are a viable way to sell homes that many investors use, it makes sense for me to include a page for that for those who need it.  Many investors are wholesaling too, so it makes sense to include.  Other competing services (like OnCarrot and LeadPropeller) offer these pages too.  It wouldn't make sense not to include.  

Just because the pages are available doesn't mean people will use them.  Each investor is using different strategies and it's really up to the investor to determine what methods they should use and what's legal in their local area.  Having a page available doesn't actually make it possible for them to do a deal using that method.  I'm not providing contracts or education on any specific method of investing, just tools that can be used with a variety of techniques.

Just to illustrate where the responsibility lies, at least in my opinion, an investor could buy an outdated book on lease options that tells them to offer rent credits and they could hire a web developer to build a custom website for them that talks about offering rent credits.  The developer wouldn't bear the responsibility for the investor doing something illegal.  They simply did what the investor wanted.  It's the investor's responsibility to keep up to date with the laws and make sure their website reflects that.

That being said, I certainly wouldn't want to offer anything to my clients that has any wording that would get them into trouble, and being that I'm offering these sites with pre-written content, I agree that I should have an idea of how things work, and I certainly try to. 

I do appreciate you expressing your concerns.  I wouldn't want to lead someone to do something that could get them into trouble. 

Thanks,

Todd

@Bill Gulley

Rent-to-Own and Wholesaling are not illegal.  Dodd-Frank does change how deals have to be structured, but doesn't eliminate them as viable strategies.  Any type of real estate transaction could lead to illegal activity if it's not done according to the current laws.

I'm not telling people to use those strategies, but for those who are, the pages are included on their sites.

And no, it's not affiliated with Bigger Pockets.

We're now offering free websites for real estate investors!

Go to http://DoneDealWebsite.com/biggerpockets

Includes:

• Motivated Seller site
• Wholesale Buyer landing page
• Rent-to-own Buyer landing page
• and more...

You can use your own domain name (not required).

Claim your free real estate investor website here!

We're now offering free websites for real estate investors!

Go to http://DoneDealWebsite.com/biggerpockets

Includes:

• Motivated Seller site
• Wholesale Buyer landing page
• Rent-to-own Buyer landing page
• and more...

You can use your own domain name (not required).

Claim your free real estate investor website here!

We're now offering free websites for real estate investors!

Go to http://DoneDealWebsite.com/biggerpockets

Includes:

• Motivated Seller site
• Wholesale Buyer landing page
• Rent-to-own Buyer landing page
• and more...

You can use your own domain name (not required).

Claim your free real estate investor website here!

We're now offering free websites for real estate investors!

Go to http://DoneDealWebsite.com/biggerpockets

Includes:

• Motivated Seller site
• Wholesale Buyer landing page
• Rent-to-own Buyer landing page
• and more...

You can use your own domain name (not required).

We're now offering free websites for real estate investors!

Go to http://DoneDealWebsite.com/biggerpockets

Includes:

• Motivated Seller site
• Wholesale Buyer landing page
• Rent-to-own Buyer landing page
• and more...

You can use your own domain name (not required).

Claim your free real estate investor website here!