Structuring a house hack partnership

[Colin Mills]

Hi all,

I am moving out of my current rental apartment in order to pursue a house hack. My landlord worked with me to help re-rent my current lease so that I would be free to go and buy a house. She was impressed with the plan and analysis I have put into the search so far and asked if I would want to partner with them on this first deal. I had not been considering a partnership, but I am keen on the idea because this could be a great way to reduce risk and come up with the down payment on my first deal.

Some key points of how we would work together:

- They want an equity partnership, not a debt partnership

- They live out of state and want to be mostly hands-off while I live in and manage the property

- They have decades of landlord experience and connections that could help me get started/mentor me

- Pursuing a 3-4 unit multi-family 

- I would live in one of the units, decreasing total rent revenue

- We would be getting an FHA loan

- We are in a market that would likely be cash flow negative for a few years (with a low down payment and high-interest rate)

The question stands, How exactly would you structure this partnership?

Some possible ideas I have thought of:

- I contribute the fair market rent for the unit I live in towards total revenues. If we make cash flow, after vacancy, maintenance, and capex reserves are filled then I take a 10% management rake before we split profits along the equity proportions. Also if I decide to rent out a room in my unit then that money is mine to use how I want.

- I don't contribute towards revenue from my unit and we split profits/expenses along the equity proportions. My management rake is effectively living for free. If I rent out a room, that also gets split evenly.

[Josh Bowser]

Quote from @Colin Mills:

Quote from @Josh Bowser:

Colin I think this is a great opportunity for you - congratulations on the hustle to get it done!

At first, it is tempting to give away too much equity in order to get your first deal done, but I would try to get as much equity as possible. The cashflow isn't going to save you in this deal with an FHA loan so I would pitch a 50/50% equity structure and give them 80-100% of the cashflow until you get they get their money back if they are putting up all the money. I think most investors would be happy to structure something like this where they are completely hands off as long as it was in a great location! If its in a less than great location, they may want some more equity.

I really like the idea of you paying x amount of rent and then subsidizing it for yourself by renting a room in your own unit.

I wouldn't be concerned about taking a management fee as much as I would be 'living for free' as you mentioned.

Would love to chat man - feel free to reach out in the DMs!

 Thanks for your input! So you think that if I rented a room in my unit that would go straight to my pockets and not count as part of our joint revenue?

Fwiw this deal is in NYC and is likely to be cash flow negative for a few years until we can either raise rents or refinance our loan payments down. Here are some mock numbers on a deal I looked at recently to better explain:

We would purchase a 3-unit multi-family for $850,000.

Monthly expenses (including maintenance, vacancy, etc reserves): $7000/mo

Monthly rents: $6900

    - Unit 1: $2600

    - Unit 2: $2600

    - Unit 3 (my unit for the first year): $1700

At full capacity it would be just shy of breaking even, but I will be living in the third unit so net cash flow would be: -$1800

Now that may sound bad for your typical cash flow market, but I am actually halving my housing expense. Once we refinance (if the rates ever come down), and I move out, it will likely be quite cash flow positive.

So how would you split that monthly $1800 liability? Right down the middle? 

Another thought is what happens when I move out and into my next deal by myself? Likely I would still be property managing, but would no longer have the free living credit from this property. Would you recommend negotiating some sort of compensation at that point?

As a sign of good faith to your partner(s) - I would be willing to cover the rest of the monthly expenses if I we're you. In this case, you would be liable to come up with the $1800 / month for the unit you are living in however you can. If they are coming up with the down payment + capex ect, then they likely won't want to also service the negitive cashflow. I wouldn't if I we're them personally! However, you can literally pitch anything and if they (your partners) are willing to split the $1800 - more power to you!

Renting out a room in your unit should not matter as you and your roommate would have a seperate agreement. It shouldn't matter where the money comes from.

WRT moving out, I would put it in writing that part of the agreement up front that you will want to be paid for your time to manage the property when you are no longer living in it!