How to Best Structure a Partnership for Investing in Rental Properties

by | BiggerPockets.com

Disclaimer: I am not a legal or tax professional, and all matters of real estate partnering should go through either legal or tax professionals (or both) before being implemented.

I hear the question quite a bit: How can a partnership be structured for investing in rental properties? I assume I get this question a lot because if you’ve read many of my articles, you know that I have used an investment partner for a lot of my properties. So I figure, why not just tell you exactly how my partner and I are structured so if you are thinking about doing it for yourself you have a little more clarity on how it can work?

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A Starting Point for Structuring Partnerships

Before I tell you how I’ve structured things with my partner, I want to give you a quick backstory as to how I came up with the structure, mostly because if you are pondering partnerships at all, this may help. Basically you are going to get two structuring options for the price of one!

I was in Las Vegas at a self-storage convention (when I thought my life path was going to be owning a self-storage facility rather than being a real estate investor), and I met a guy there who was in town from Miami. This guy owned a couple businesses, and it didn’t take long for me to realize that he could be a wealth of information. I got on the topic of telling him that I knew someone who was interested in going in on a self-storage facility with me, but I had no idea what kind of partnership to offer — what would it even look like? What kind of splits? What kind of investment requirement?

outsource-delegate

Here’s the structure he suggested to me:

Your investor puts down the money required to buy the business, then you give him 30% off the top of the NET each month and then split the remainder 50/50 until he is paid back, at which point the split then goes to 50/50 straight.

I was intrigued! He went on further to say it can be very incentivizing to the investor because that 30% goes a long way, and then it’s free money after that. And it’s of course a good deal for me because I’m making free money the entire time. I had to say — he had a point! I stuck this idea in my back pocket and thought about it often, and then when it came time for me to take on an investment partner, I pulled it out of my back pocket!

Rental Property Partnership Structuring Options

So there’s the first way to structure a partnership: 30% off the top of the NET, then 50/50 split after that. I was so excited about how awesome this sounded that I couldn’t wait to do the math when an investor partnering potential came around. However, I ran into a hiccup.

Being the spreadsheet nerd that I am, I started working all of the math for my first potential rental property purchase and my newfound favorite partnership structure in quite a bit of detail in Excel. I knew the numbers on the property (anticipated cash flow, income vs. expenses, purchase price, etc.), and I tried to apply the 30/50/50 split to it. I ran into a major problem. That 30% off the top then 50/50 split bit led to negative cash flow! I don’t remember how exactly, but basically the numbers didn’t work. I thought, oh no, my magical partnership structure proposal is in the water! I tried every which way to make it work, but it just wasn’t happening.

I continued working on it, trying everything I could pull out of my hat, and I finally came up with a logical solution. So, remember that one method — the 30/50/50 method — because it could be very useful on some partnerships. And now here is one that works for smaller-dollar investments:

On my first little rental property I wanted to buy, a lonely little (adorable) $55,000 single-family house in the suburbs of Atlanta (oh, the days of those prices!) that was going to rent for $975/month, I just couldn’t make that 30/50/50 split work because it led to negative cash flow. Here’s what I did find that would work, though, and it did because my partner and I still operate several rental properties under this exact partnership.

Related: 4 Types of Win-Win Partnerships That Will Help Grow Your Business

The Terms

  • Partner puts in the cash required for the down payment and the closing costs; I take out the mortgage and do the work.
  • We split the NET (profit or loss) 50/50.
  • If we sell the property, we split the NET (profit or loss) 50/50.
  • Equity is always split 50/50, including appreciation and any possible refinancing.
  • I provide my investor with a statement and direct deposit every month.
  • We both report the 50% income (or loss) on our personal taxes.
  • Our partnership is legalized through a legally documented Partnership Agreement (no LLCs, etc.).

business-project

Pretty simple, huh? All I needed to adjust from the 30/50/50 thing was the 30% off the top part. But wait, why would that deal be enticing to an investor? That 30% off the top to pay him back for his initial investment seems kind of important, no? The answer is: Yes, it is important. It’s an important enticement. When you are talking about high-dollar investments, like commercial level, i.e. an investor is going to be putting down a mega chunk of change, that 30% off the top may be critical to offer in order to convince anyone to buy in. But at the residential level, it’s not as critical.

But wait. What’s in it for the investor in this straight 50/50 deal? Good question. The theory of this split is it’s a 50% investment for the person willing to put up the cash and a 50% investment for the person willing to take the risk. My partner’s name is not on the property, so if anything happens to it, he is not liable. So him putting up the cash constitutes a reward of 50% of the NET income, and my accepting all of the liability and also doing all of the work and management for the property (although minimal since we bought turnkeys) constitutes the other 50%.

Further Points to Consider

If you aren’t convinced this is a balanced enough split (money vs. risk split), here are some further points to consider with regard to why this may be an enticing deal for the money partner:

  • What if someone doesn’t qualify for a mortgage but they have cash they want to invest? This is a great deal for them because they can still take advantage of leveraging, even though they can’t get it under their own name. Score!
  • What about the 10 mortgage limit? A big stress for buy-and-hold investors is what to do after they hit the 10 mortgage limit. Well, investing with a partner this way frees up one of those mortgage usages for you! My investor partner also invests in properties by himself, so with our partnership he is able to still do 10 of his own with mortgages and THEN have ownership with me — so he can go way past 10!

Starting to see why this setup may be enticing for the money investor? And then of course for me, the risk investor, my returns are infinite! Since I am no money into the deal, any returns I make are technically infinite returns. That’s hard to beat! And then of course the more obvious reason someone may want to be the risk investor, so to speak, is if they are low on cash but still want to buy into properties.

Now a couple of points worth noting:

This setup can be done with or without the use or mortgages or other loans.

It can easily be done with an all-cash purchase. However, I don’t know the exact balance of the money vs. risk investment — like if you own it outright, you don’t have the mortgage risk or the offering of covering the mortgage side of things (see previous incentives for the cash investor), so I’m not positive how you would convince anyone to do it. But who knows? If you pull it off, let me know how you did it.

under-contract-deals

Don’t partner with just anyone!

My investor partner is a very long-term friend of mine, and we have done a lot of business-related things together. I trust him fully, as he does me (obviously, since his name isn’t on the house), but even that has risks. I don’t anticipate anything going crazy, but you just never know. So know who you are going into business with!

Not just from the standpoint of giving your money to someone, but in how well they will manage the properties once you guys own them together. Bad management will tank an investment, so that isn’t good if you dump money into something and that happens. I recommend a ton of networking and other awesome stuff on BiggerPockets, but I don’t recommend soliciting around to anyone who is willing to invest with you. Come on, now.

Speaking of partners going crazy, make sure you are protected.

It’s important to be smart going into a partnership, and it’s also important to be smart legally with the partnership. Spell it all out so there is no question later. And if you do it like I did, where the cash partner’s name isn’t on the house, make sure it is set up that should something happen to you (death), that person has a way of getting the house. You can do this type of legalese with an LLC or a legal real estate contract, etc. But do something.

Related: Real Estate Partnerships: How to Find a Great Fit & Work Together Towards Success

Make sure your numbers make sense.

This type of split is based on rental properties that generate monthly cash flow, and in order for the split to be worth it, the margins need to be of certain size. It wouldn’t be very enticing to offer a partner $10/month in cash flow split. If you are wondering if a cash flow or margin is high enough to entice anyone, run a calculation on how long it would be until the investor would get his initial investment back. Oftentimes running that number suddenly will make it seem like a pretty good deal!

For example, on the margins, one of our properties nets anywhere from $400-500/month, so that is $200-250/person/month, and his investment was only around $16,000. So that’s actually not too bad of a turnaround time — never mind the equity and tax benefits he gets from it as well.

Consider your conscience.

There is one factor I didn’t think to consider before I jumped into properties with my partner. This was my conscience. We had a couple properties that did pretty badly for about a year, and essentially I had no profit to give him. I was SO stressed about it! I would’ve been fine with it all had he not been in the picture because the margins on these properties were so high, I’d be able to make up for it pretty quickly once they were cash-flowing again, and I knew the big picture about how good of investment properties these things were, but nonetheless, I felt horrible. I was so stressed out having to report nothing good to him. It was not something I had taken into consideration going into it. So don’t forget to weigh the “what if things go wrong” scenario.

There you have it! Now you know how I am structured with my investor partner on my rental properties.

Any other creative partnership structures you guys have tried and liked? Have you been involved in any partnering? If so, pros and cons?

Leave your comments below!

About Author

Ali Boone

Ali Boone(G+) left her corporate job as an Aeronautical Engineer to work full-time in Real Estate Investing. She began as an investor in 2011 and managed to buy 5 properties in her first 18 months using only creative financing methods. Her focus is on rental properties, specifically turnkey rental properties, and has also invested out of the country in Nicaragua.

76 Comments

  1. Curt Smith

    If the deal is large enough to warrent the fuss to settup a deal specific LLC, both the lender and the investor are equal members, then the K-1 can divide the tax benefits too, which is an additional benefit to attract an investor. A CPA needs to step in to confirm that an LLC as a pass through, and partnership tax return for the LLC/partnership and K-1 is how tax benefit sharing is accomplished. I believe so.

  2. Michael Seeker

    I don’t think a 30/50/50 split could be negative if you’re applying it to net income as you suggested. If net income is $100/month, then $30 goes to the investor to pay down their principle and the remaining $70 is split with $35 going to each party. The only way this could go negative is if the investment it’s being applied to generates a negative cashflow.

    The primary difference between the 30/50/50 split and a 50/50 split is that the money partner does not recoup any of their initial investment each month. Instead it is maintained as an equity position which would be paid out of any sale before splitting up profits (losses). The 30/50/50 split is a bit more advantageous for the money partner (quicker return of capital) but on smaller deals it’s probably not worth the hassle to set up. There may also be a different tax treatment on the 30% since it would be considered return of capital and not income.

    I’d say stick with the 50/50 method where the money partner is rewarded with sizable low hassle returns and the non-money partner is rewarded with payment and equity for their sizable efforts.

    • I’m very interested in creative ways to structure partnerships and I enjoyed your article. However, if a money partner willing to put in 100% of the down payment and closing costs, why not hire a property manager? It seems like you’re just acting as a property manager and taking 50% of the profits. Am I understanding that right?

      • Blake Elder

        Property managers don’t help put deals together and make sure that the deal is a good investment before purchase. This type of investor wants someone active to find the deal, put it together, then take care of all the details to make it work after closing. If you know of a property manager that does all of that, let us know who they are!

      • Ali Boone

        Good question Cory. Not totally. We have a property manager on the properties. The “work” I do on the property is just the over-seeing, decision-making, statement distributing, loan/refi work, etc. So all oversight work, not management of the actual property.

        But more of the profit split is based off the risk taken by me (since I’m the only one named), more than the “work”. If that makes sense.

        • Christopher Jenkins

          This question is for Ali or anyone who might have the expertise ….. Can you explain or describe the process of getting the mortgage solely in your name and not the partners???? Thanks!

  3. David Roberts

    Heres one:

    Cash investor puts up the purchase plus rehab. The partner manages the rehab and puts property manager in place. Partner dies cash out refi and returns money to investor with 25% net cash flow going forward. Partner gets 75% (all the risk). Cash guy is made whole making 100% return, partner takes the risk, making 100% return.

    To make it hands off, put property manager in place so nobody does much work after the rental is set.

    If not all the money can be cashed out, then you give that cash investor 50% until it all gets paid back. Then goes to a 25/75 split.

  4. Brandon Gentile

    Ali, thanks for the post. Gives me some great ideas. I have a partner of mine that is going to start doing small apartment complexes with me and we have been trying to think of ways to partner on the deal and split up equity/cash flow. Definitely got the creative juices flowing!

  5. Your bio reads that you have used creative financing methods. Can you provide a few examples? Great article and solicits many questions that need to be answered prior to the deal (literally and rhetorically). Thank you.

  6. Peter Sejna

    Thank you Ali for a great article.
    just one question to clarify something for me:

    you say that you take out the mortgage and do the work. where does the money for repairs/remodel come from? do you take out mortgage that includes the repair/remodel costs or do you cover the these costs from your own pocket.
    I assume mortgage covers repair costs since in many cases repair costs could be as much if not more than down payment.

    how would you structure your partnership if you cannot get mortgage that includes repair costs?

    thank you

    • Ali Boone

      Hi Peter, thanks for asking! Not sure I know exactly what you mean by a mortgage covering repair costs? Those are usually separate and I’m not positive how they can work together. Of the income we receive, I pay the mortgage as well as any repair costs off the top, and then split the remained after those are paid.

  7. Wesley Pittman

    Hi Ali,

    Thanks for sharing! One quick question to clarify for my understanding- when you say “net income” are you talking about “net operating income” or “net cash flow.” As Michael indicated, in his comment on December 3rd, I don’t see how the 30% cut could make a property cash flow negatively unless it was taken out before operating expense. I ask because 30% of cash flow is likely a pretty small concession- 30% of NOI is HUGE and would basically eradicate the margins on all of the residential properties I’m familiar with in my area (I’m west coast).

    I like your simple 50/50 split model and I’ll be approaching folks in my area with that going forward.

    Thanks!

    • Ali Boone

      Awesome Wesley, keep us posted on how it goes! As far as your question… I would honestly have to look back at my old spreadsheets and see what numbers I came up with and how. I admit I didn’t look at those before I wrote the article to know if I was speaking exactly right. I remember the 30% putting an unacceptable dent in the numbers, but I’d need to double-check on why.

  8. Michael Faulk

    Ali-

    Thank you so much for describing how you created a mutually beneficial partnership. I am in the process of structuring a partnership for a rental property very similar to what you outlined. I actually took some of the points from your article and included them in our partnership agreement.

    One question for you: When you constructed your partnership agreement did you consult with an attorney or did you draft the agreement yourself? This will be my first partnership and I want to make sure I am doing the right thing to protect the both of us.

    Thank you for answering my question and writing this post! It was awesome how you described everything and it kinda gave me chills because I am going through this exact type of “creative finance”

    Thanks again-
    Michael

    • Ali Boone

      Hey Michael! Yay, glad the article helped and that’s awesome you are getting some partnerships worked out! Keep me posted on how they go. I do recommend speaking with a real estate attorney (one who deals with investments a lot, not just someone claiming they can cover real estate agreements). When it comes to legality, I don’t typically recommend shorting out too much. But, creating your own agreement could be equally as fine, as long as you are somehow able to confirm the language and that there are no outs in it and everything is covered, etc. But for the most part with any real estate related (taxes, laws, etc.) I do recommend consulting a professional.

  9. Troy M.

    I don’t think you can approach partnership agreements as “one size fits all”. Each deal is different. Would a 50/50 split be equitable when the $on$ return is 10% vs another deal where it is 30%? Also, what is the exit strategy for a particular property? That too, must be taken into consideration. Finally, the investment objectives of each partner must be taken into consideration. Is the partner who’s putting up all of the cash more interested in monthly cash flow or capital appreciation? Same with the other partner, are they interested in cash flow or capital appreciation. At the end of the day lots of variables must be considered in each deal to create a “win/win” proposition.

    • Ali Boone

      I couldn’t agree more Troy. My intent with this article was just to get the juices flowing and open up the door to possibilities for how a partnership can be structured. I do recommend everyone take into consideration each point you mention, so thanks for sharing those!

    • Brad Ratushny

      Ali, great article as always.

      Has anyone ever come across a book, article, etc. that goes deeper into partnership structure?

      I’ve been searching for a resource that gives insight into different splits, exit strategy, operating accounts (reserves), etc.

      Thanks again!

  10. Paula R.

    Great discussion! Very pertinent to my situation evolving right this minute

    Now that I am pulling in an investor rather than coming up with the down payment and repair costs myself (as in the past), I am looking at working deals differently. I am in the process of working two deals, one with a NV resident and the other with a CA resident.

    In one scenario a house has a loan from investor for purchase price plus repairs, using the house as collateral, with a rate slightly higher than I could have gotten had I put the down payment and paid for repairs myself. So this obviously is a return to investor higher than he could have gotten by having funds in a savings/cd etc. Then I am paid the 10% management fee (long-term rental) and profits are net profits are split after ALL expenses. Depreciation is split, too. Ownership is held 50/50 in our respective Living Trusts to avoid probate.

    In another scenario, a NM LLC (no annual state filing or fees) is formed with me as Managing Member which doesn’t trigger the $800 annual fee for the CA member, but this way the Operating Agreement can give the other member all the depreciation (they are in a higher tax bracket than I am).

    Any comments on which one might be better? I’d like the protection of an LLC but the NV investor has had a bad experience with a NV LLC and wants to look at other options.

    Thanks for all your valuable input!

    • Ali Boone

      Hey Paula! I would definitely defer to either a tax or entity expert on this one as giving wrong advice could be bad! And I’m unfortunately not an expert.

      If the deal with the NM LLC is with the CA resident, how do you plan on avoiding the $800 annual fee for CA? They don’t care where the LLC is formed, they only care if anyone in it has residence in CA.

  11. michelle williams

    Great read! I’m so glad I looked at this post, being a new investor I have been worried about how to start with very little money and wanting to purchase turn key properties. Looking at your profile I would like to invest similar to your strategy, I live in Los Angeles so the thought of trying to purchase a cash flowing property seems a bit limited. I will definitely look into your other articles and connect with you soon!

    Also just starting out how should I legally protect myself with an investment partner?

  12. Jeff P.

    Hello all!

    My apologies in advance about the long post…Any thoughts on my situation would greatly be appreciated!

    I have the money for a down payment + repairs + acquision costs. I need a partner for the financing part. The property I’m looking at is a SFH. I would put down $40K in total and my partner would need to finance $120K.

    I already have a seasoned property manager as a tenant in my property across the street. He’ll manage this new property for free based on a reduced rent he’s paying and he’s excellent (I have 7 years working with him). Therefore, I would also take care of the managing of the property. If my tenant moved away for some reason, the property management fee would be my responsibility in the partnership.

    Any ideas on deal structuring in this case?

    One thought of mine was having my father pull the loan, but he’s 75 years old so my questions are:

    1. Would a bank give a 75 year old man a 30 year loan?
    2. If they do, there a good chance he won;t be around to pay if off so can I take over the loan without the bank calling it in full? My research says I can IF I live in the property: however I’m not sure on an investment property…

    Thanks in advance for your thoughts and input!

    • Ali Boone

      I would talk to a lender (an investor-friendly one) about those questions. I don’t see why your father couldn’t qualify just because of his age, but I’d confirm that and ask what happens to the loan after he’s gone. It’d be the same as what happens to any mortgage when someone dies (and I’m not sure what that is), and it’d also probably be dependent to if you guys have a partnership agreement in place. Maybe not so much for the mortgage company, but for the property itself.

      Why would you need someone to finance $120k if you are getting a mortgage on a property?

    • David miner

      I’m a long time lender.
      It’s illegal to age discriminate. He could be 90 and the bank must give him a 30 year loan if he otherwise qualifies.
      You may be thinking of a reverse mortgage where payoff of the loan will generally be required within 12 months from the death of the last living mortgagor (borrower).

      But with a forward mortgage ( the subject of almost all financing on Bigger Pockets), the bank/lender may technically be able to call the loan due if the borrower died; however the reality is otherwise. Generally speaking, if the monthly payment is being made per the terms of the loan, no one at the bank will likely know the difference, or care. (Probate, estate or other death related legal action can affect this assumption.)

  13. I found this article very interesting since I’m trying to bring on an equity partner who would become a percentage partner in my rental properties. I’d like to sell a 22% interest in my two rental properties for $60,000. In return, the partner would receive 22% of the net rental income every month until I sell the properties. I ran some numbers using a 3% increase per year for each property. I also used the present amortization schedule for each mortgage. If the properties were to appreciate at 3% a year, I could sell the properties at a nice profit and my partner would receive 22% of the net selling price. The partner’s 22% would equal $69,000. After figuring in the five years of cash flow, the partner’s Internal Rate of Return is a few basis points shy of 12%.

    Does a partnership like the one I describe sound feasible?

    I’d like to hear comments.

    • Ali Boone

      I can’t really say right off DJ, but I’d be highly cautious about assuming a 3% increase in value per year. Maybe it happens just fine but you’d want some kind of contingency in the partnership agreement to say what happens if it doesn’t. What if the property loses value, etc? You’d have to really spell out exactly what his/her money buys and all the exit strategies for it.

      Why 22% exactly?

  14. Kee You

    Great read Ali. Thanks for sharing. How would the right of survivorship be set up when the property in itself is all under your name (in the title and deed, etc)? Did you apply a clause related to this within the agreement with your partner? Does the agreement bind both you and your partner to the equity of the property without having to put your partner’s name on the title?

    • Ali Boone

      You can do however fits best for how you want it structured, likely in the partnership agreement if you set one up (recommended). I also have the properties willed to my partner in case of my death. And yes, we both get (split) the equity.

  15. Reaz H.

    Usually if you use financing for residential properties, lenders may balk if you borrow funds for the downpayment. Have investors pursuing partnerships faced this situation and is it common? I’ve faced this question for my previous real estate deals but so far I’ve been using my own money and so I haven’t found out what happens in the other case. In a partnership this might be the case. What happens then?

    • Ali Boone

      That is true, Reaz. The trick is the “seasoning” time of the funds. Each lender will have a different seasoning time requirement. Oftentimes it’s say 60 days. Any funds you use to buy something or as a down payment, the source of them won’t be checked if they have been in your account for longer than that seasoning period… {cough} {cough}. Maybe that’s what a little birdie told me that I may or may not have done on my properties… {cough}

      • Reaz H.

        Thank you for the response. I agree with your conjecture. I believe the funds have been stabilized/seasoned, lenders do not ask. After all they only ask for 2 month’s bank statements. So perhaps it would be wise to write up a partnership where the funds are transferred well in advance of the transaction.

  16. Zachary Alley

    Great article – I’m thinking about doing some out-of-state investing with a friend (I live in Denver CO area but will be investing in northeast PA) for our first deal and it’s great to have these suggestions help us avoid a mistake.

  17. Mike Lauer

    Ali great article. I’m new and trying to educate myself right now. Can you explain how you end up with a negative cash flow in any deal that involves percentages? Unless the 30% off-the-top means 30% from the gross rents.

    • Ali Boone

      Mike, can you specify exactly what I said that you are asking about? I can’t find the line where I was talking about it. It’s been forever since I wrote this…just need to make sure I know what you are referring to so I can answer right.

      • Mike Lauer

        Here’s the part I’m asking about:
        “So there’s the first way to structure a partnership: 30% off the top of the NET, then 50/50 split after that. I was so excited about how awesome this sounded that I couldn’t wait to do the math when an investor partnering potential came around. However, I ran into a hiccup.

        Being the spreadsheet nerd that I am, I started working all of the math for my first potential rental property purchase and my newfound favorite partnership structure in quite a bit of detail in Excel. I knew the numbers on the property (anticipated cash flow, income vs. expenses, purchase price, etc.), and I tried to apply the 30/50/50 split to it. I ran into a major problem. That 30% off the top then 50/50 split bit led to negative cash flow! ”

        What confuses me is that you say that the 30% of NET off the top put you into negative cash flow. But even if your cash flow is $1 per month, you’d still get 35 cents ($1 minus 30 cents, split the remaining 70 cents 50/50). That’s why I suggested maybe the 30% off-the-top actually came from the gross rents. But now that I think about it more, this wouldn’t be a good deal for the investor either. He’d get the 30% of the gross rents, but then lose money on the split in negative cash flow.

        Or maybe I’m just reading the whole thing wrong

  18. Mike Lauer

    Here’s the part I’m asking about:
    “So there’s the first way to structure a partnership: 30% off the top of the NET, then 50/50 split after that. I was so excited about how awesome this sounded that I couldn’t wait to do the math when an investor partnering potential came around. However, I ran into a hiccup.

    Being the spreadsheet nerd that I am, I started working all of the math for my first potential rental property purchase and my newfound favorite partnership structure in quite a bit of detail in Excel. I knew the numbers on the property (anticipated cash flow, income vs. expenses, purchase price, etc.), and I tried to apply the 30/50/50 split to it. I ran into a major problem. That 30% off the top then 50/50 split bit led to negative cash flow! ”

    What confuses me is that you say that the 30% of NET off the top put you into negative cash flow. But even if your cash flow is $1 per month, you’d still get 35 cents ($1 minus 30 cents, split the remaining 70 cents 50/50). That’s why I suggested maybe the 30% off-the-top actually came from the gross rents. But now that I think about it more, this wouldn’t be a good deal for the investor either. He’d get the 30% of the gross rents, but then lose money on the split in negative cash flow.

    Or maybe I’m just reading the whole thing wrong.

    • Ali Boone

      You may not be Mike. I honestly don’t remember exactly what I was referring to…I wrote this article a really long time ago. I remember I had a spreadsheet that I ran all of the numbers on but I’d have to find it to see exactly what I was talking about. Sorry!

  19. The money partner puts up all the money to get in to the house, the other partner does the work and has the mortgage… how do you handle it if you have a large repair expense early into deal?

  20. Kevin Terpening

    Assuming the ‘risk’ partner will be doing the property management, do you not include that aspect in the expenses and just split 50/50 or would you subtract the PM fee then split the Net 50/50 and the ‘risk’ partner keeps the PM fee?
    If you utilize a PM then it is not a question, but would the ‘cash’ partner feel inequitable in this if the ‘risk’ partner is the PM?

    • Ali Boone

      Not sure on that one Kevin as I’ve always used a PM, separate from the partners. My guess is it would be most fair to pay the risk partner the flat PM fee and then split the net 50/50…so no different than if the PM fee were going to another PM.

  21. Saul Arredondo

    I am 23 years old and I’m am doing research on real estate I came across Bigger pockets and it’s shown me so much. Anyways I live in southern California. I am going to be partnering up with my brother, sister, and cousin. We all are saving up to bring in a little cash to be able to put in as a down payment on our first rental property. We are planing on investing in Vegas Nevada. How would you recommend should we set up our partnership?

    • Ali Boone

      Hi Saul. I can’t really say for sure as I don’t know all the logistics of how you guys want it to work. You can see how I structured my partnership in the article, so maybe that triggers an idea for you. I just caution you to be sure you are fully up on how to run cash flow numbers on properties. With 3 of you splitting a property, and in Vegas, there may not be high enough cash flow margins for it to really make sense.

  22. Trudie Wilhelm on

    Hi Ali and anyone else that may want to share their insight.

    I have several investment properties, a couple I have used as short term rentals (STR). I had them in my city and now the city regulations are turning against STR. I love STR but I am older now so having one in a place other than my home town would be too challenging. My BFF lives in a city where the STR market is flourishing year around. I thought of purchasing – all cash – a home to use as a STR. My friend and her husband would be in charge of the rental, essentially being the oversight people and running the STR. They wouldn’t do the work on the house, but they would hire the service people to do the work…weekly lawn maintenance, house repairs when needed, snow removal in winter, house cleaning between short term renters which might be often, etc, etc.

    Since I would be purchasing the house 100% I thought I would give them some equity in the house in lieu of being paid a monthly PM fee. We would share in the profits and the appreciation when it sells. And yes, because of all the information I have read here for which I am SO grateful, EVERYTHING needs to be spelled out in spades.

    My question…how much is fair equity to give them?
    We are talking about a house value in the low 200’s that if it was rented 75% of the time would net about $22000/year I calculate.

    Does 20% equity sound reasonable or higher or lower? Would we do a 50/50 split on the monthly net or follow the same percentage as I am giving them in equity? I want to be really fair to all.

    If anyone has any insight I would love to hear it.
    Thank you so much,

    • Ali Boone

      Hey Trudie! Well, I forewarn that what I’m about to suggest considering is a little biased because I’ve recently looked at the properties I have a partner on and realized how much easier (and cheaper) it would have been to take a loan from him instead of partnering. All of my properties have appreciated like crazy, so I’ll be splitting all of that rather than keeping it, and he’s getting half of the cash flow too. On some properties that may work out fine, but I’m basically losing a ton of money. It’s still great money that I’m getting, and still “infinite” returns since I was no cash in, but still. So, I encourage you to consider just paying the flat PM fee. It sounds like their “job description” would be exactly that of what a PM would do. So if you split equity, you could potentially be paying a tonnnn of money for “PM services”. Maybe think of what a normal PM fee for that would run and the compare that to different levels of equity. At least paint the picture.

  23. I want to buy an investment property and have the cash for the down payment, but not the DTI. I want to bring in a family investor to partner with me who has good credit and income, but the DTI won’t be an issue. Since I am putting forward all the cash, found the property and managing the investment, how do you structure the percentages of the profit?

    • Ali Boone

      Hi Carrie. Well you could almost do it exactly like I did it, but since you would also be finding the property and managing the investment…I’m not sure the best split. Maybe instead of 50/50 it’s like 70/30 or 80/20…depending on how those numbers work out? Basically decide how much someone offering the mortgage piece by itself is worth.

  24. Matthew McNeil

    What I really appreciate about these posts is people are genuinely trying to figure out the nuts and bolts of setting up partnerships that are mutually beneficial to the parties involved. I have three rental properties which have been put together using typical old fashion methods; I put down 30% cash and got a loan from a bank or mortgage company. This article has intrigued me because I feel I’m at a place where I can consider looking at other funding options.

    Here’s my summary and two cents worth.
    1. I wouldn’t offer any split on the net cash flow south of a mandatory $5000 buffer held in the bank to cover unforeseen maintenance issues, and to cover at least 2 months mortgage payments during vacancies.

    2. Avoid “partnerships.” I absolutely AGREE with Ali’s June 29 post. I would never partner because attempting to detail broad Operating Agreements describing how the asset is to be managed is never sufficient because there’s always some odd thing that’s bound to happen which the Operating Agreement failed to address. I’d make an offer to a potential investor (contractually bound) providing the same terms and benefits as a “partnership” but, rather, it’s a loan; with the understanding that I manage it based on my history and track record with investment property. He/she puts up the cash for the down payment with the understanding it will be “seasoned” for 2 months in my account in order to help me qualify for the mortgage which will be in my name.

    3. Finally (and this stems from my point #1); I would define the opportunity to the investor as an equity position which would be paid out of any sale using agreed upon terms; 50-50,60-40, etc.

    In a nutshell – the emphasis is the long-term profits on equity growth. Secondary is the division of net cash flow.

  25. Matthew McNeil

    On these structured Partner Agreements – does anyone have any input on the Capital Gains Tax and 1031 Exchange implications. If an investor is secured for the down payment and you carry the mortgage, isn’t the tax obligation connected to you when you sell? If you sell and spit the net profits 50-50 I’m assuming that’s after the taxes are paid? Capital Gains taxes are hefty. Any avoidance of such requires an exchange on a like-kind property.

  26. Thank you ali for the article. It’s been very helpful and I have used ur advise in one deal already and so far so good.
    But Now I am looking at a rental property with a good monthly income. I have a partner that wants to offer me the full amount for the property so no bank is needed. The property is $350k He agreed to the 50/50 split on the monthly net income he is having an issue with the 50/50 split if we ever to sell the property since he is puting down all the money.
    He is suggesting and only if we are to sell the property is for him to be paid back the $350k and split and profit or loss after the 350k is paid .
    What are your thoughts ?
    Have you ever dealt with an investor that put down the full amount ?
    Thank you

  27. My brother suggested I may like this website. He was once entirely right.
    This submit actually made my day. You cann’t consider just how so
    much time I had spent for this info! Thanks!

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