Rental Property Investor · Owings, MD · Member since 2020 · 32 posts · 9 votes
I have been investing in real estate and managing the properties (15 units) on my own for years but I have reach a point where I would like to scale faster. A long time friend reached out to me about forming a partnership. He has a lot capital and is looking to invest. Our plan is to brrrr five properties and use them as mid and short term rentals. He has all the capital but no real estate experience or infrastructure. I have years of experience, all the contacts, systems in place, knowledge, etc.
The partnership is basically me providing the day to day work and he would provide the funding. How do we structure the percentage of ownership of the business? Is there a better way to do this (he doesn't want to just provide a loan)? After we brrrr successfully would he recoup his initial investment and keep the percentage of the business?
A partnership (general or limited), multi-member/manager LLC, or even less formal joint venture are flexible in nature so you can allocate the sharing ratios (capital, profits and losses) any which way you agree upon and changes can be made based on facts and circumstances in any given year (ie - you make special allocations). I think your decision on what's reasonable and fair and how you decide to operate heavily depends on the 2 factors you noted - your time and effort and expertise and the capital at-risk to your potential partner. How would you go about assigning the value to what you offer which is more subjective compared to actual dollars committed (could be equity or debt or a combination to your partner)? I would suggest you formally execute an agreement (file with the Secretary of State, get an operating and/or partnership agreement, open separate bank accounts in the name of the entity, maintain minutes and document key decisions, etc) and work with an attorney and/or tax professional (CPA and/or EA). They will quiz you on your goals, objectives, time horizon, pros and cons of different ways to operate from a legal and tax perspective, etc so you can do what's best in your opinion and unique situations.
A partnership (general or limited), multi-member/manager LLC, or even less formal joint venture are flexible in nature so you can allocate the sharing ratios (capital, profits and losses) any which way you agree upon and changes can be made based on facts and circumstances in any given year (ie - you make special allocations). I think your decision on what's reasonable and fair and how you decide to operate heavily depends on the 2 factors you noted - your time and effort and expertise and the capital at-risk to your potential partner. How would you go about assigning the value to what you offer which is more subjective compared to actual dollars committed (could be equity or debt or a combination to your partner)? I would suggest you formally execute an agreement (file with the Secretary of State, get an operating and/or partnership agreement, open separate bank accounts in the name of the entity, maintain minutes and document key decisions, etc) and work with an attorney and/or tax professional (CPA and/or EA). They will quiz you on your goals, objectives, time horizon, pros and cons of different ways to operate from a legal and tax perspective, etc so you can do what's best in your opinion and unique situations.
This is what I’m doing now. I hired a lawyer on UpCounsel to review the operating agreement. The operating agreement should spell out the details as @Jeff Nash stated above.
@Jeff Nash@Hamp Lee III Thank you for the information. We are planning to set up a LLC with partnership agreement, bank account, etc. What we are struggling with is the percentage of ownership breakdown. Do you think we should set it up as 50%/50% as he will contribute all the actual dollars and I would contribute all the actual work? We could also make sure he gets paid back his initial investment first?
Just need guidance on the best way for both of us to grow together.
@Ryan Miller on the surface that might seem "fair" to an outsider like me that does not have all of the details, so you really need to work it out with your partner and some professionals to structure it properly. There are other things that might come up like guaranteed payments or priority profit allocations. The good thing like I mentioned though is that if you start the allocation %s one way, and for whatever reason believe it ought to be changed or updated, you have that flexibility with a partnership so it is not rigid.