You want to get into multifamily investing and you’ve been out there looking for deals. You’re getting some traction on a couple, but you realize that your lack of track record is keeping you from getting the deals under contract. You’ve raised some money, but not nearly enough to do the deal yourself.
What do you do?
Your mentor advises you to partner with someone more experienced who might be able to support you and possibly help you raise some or all of the money for the deal. This would, of course, give you only a slice of the pie (and not the whole thing), but you realize that it would also get you into your first deal. This would give you track record, and you’d be poised to do your next deal on your own.
This all sounds great, but how should you structure the deal with that potential partner?
Here are my thoughts based on conversations with other investors who have partnered on deals.
3 Ways to Engage With a More Experienced Partner For Your First Multifamily Deal
Scenario #1: Bird Dog the Deal
You have verbal agreement on a deal or maybe you even have a signed LOI. Your experienced partner will put the deal under contract, and he might pay you something — say, a third of the acquisition fee (which is usually 1%-3% of the purchase price) at closing. Make sure you check with your attorney to make sure you’re not breaking any laws if you’re doing this without a broker’s license.
Scenario #2: Wholesale the Deal
If you have the deal under contract, you can “assign” the contract to your more experienced partner. Your profit is the spread between your contract price with the seller and that with your partner.
As a condition of either scenario, you could negotiate with your partner that you continue to stay involved so you can learn from the process.
Scenario #3: Share the General Partnership With Your Partner
In this scenario, you and your more experienced partner become “general partners.” This is appropriate if you want to do MOST or ALL of the work but perhaps need help raising money and/or want ongoing support throughout the process. There are 3 types of roles and responsibilities that will determine the equity split or “General Partner Share”:
- The “Contract Share”: 20% of the general partner share is for finding the deal and getting it under contract.
- The “Raising Money Share”: 50% is for raising the money.
- The “Management Share”: 30% is for being the primary person managing the property after closing.
Here is an example of how this would work in practice.
Let’s say you and your partner purchase a building for $2M and require $400,000 to close. The investors get 80% of the deal (this is the “Limited Partner Share”) and the General Partners (you and your partner) get 20% (this is the “General Partner Share”). This is how you decide to split the General Partner Share:
- The “Contract Share”: You find the deal and your partner helps you analyze it and get it under contract. You split the Contract Share 50/50 so that each of you get 10% of the General Partner Share (for a total of 20% which makes up the “Contract Share” portion of the General Partner Share).
- The “Raising Money Share”: You raise half the money, and your partner raises the other half. Again, you split the Raising Money Share 50/50 so that each of you get 25% of the General Partner Share.
- The “Management Share”: You’re the primary manager but want ongoing support from your partner. You decide to split the Management Share 60/40, with 20% of the General Partner Share going to you and 10% going to your partner for his ongoing role in the deal.
So in this example, you would get 55% of the General Partner Share, and your partner would get 45%. The terms of your arrangement would be the operating agreement.
Don’t let your lack of experience of capital stop you from pursuing your dreams of financial independence with apartment building investing. Instead, partner with a more experienced investor and get yourself into that elusive first deal. Once you do, the sky’s the limit!
What do you think? Could this work?
Leave me a comment and let me know what you think!