Friend wants to start partnership, no experience but has capital and credit. How should I structure?

Question

I have been diving in head first when it comes to real estate investing and have started getting some people I know excited about what I am doing. I have a friend who wants to get involved, have a 50/50 partnership, and I am wondering the best way to structure it (or if to even do it). Here are some details:

He has capital, and has access to more.
He has good credit, no mortgages to his name.
He is extremely risk averse, which can be good and bad (In my opinion)
He does not want to actively partake initially. Knowing him quite well, once we get a deal under our belt he will jump on full board.
He has zero RE knowledge as of now
He wants both of us to fund the projects

So where I stand - I'm comfortable doing a 50/50 partnership but I don't want to put in money for our first deal. The way I feel is I bring 50% worth of the deal to the table with my RE understanding, the work I would put in locating, negotiating, and securing a deal. I also have access to capital now, so I would essentially be giving half of my profits away if I find a good deal. On the flip side, in the future there would be more opportunity with the combined capital and work (he really will get into it once he starts making money).

Please let me know what you all think, the advice here is great and I want to make sure I'm not missing anything (good or bad).

Thanks!

Kyle J. · Answer

If he has the capital and just wants a passive role, why not just have him be your private money lender and pay him an interest rate on the money he loans instead of giving up 50% of the profit when you'll be doing all the work?

Brian Mathews · Answer

Put it in writing and make it all legal. It would sure be a shame after all the work is done and he's refinanced in his name to tell you to take a hike. Or halfway through the process the two of you have a disagreement about something and you both lose. Money makes people do some weird things.

Cal C. · Answer

You have one investment deal under your belt (according to your profile) and he is only asking for a 50% cut. Can you say winning the lottery?

Timothy Cervantes · Answer

From what I'm hearing with my business ears (not REI ears because I'm a new Investor) it sounds as though he WANTS you but you don't NEED him. I'd say you're in the driver seat. I would structure any planned business in your favor based on you doing most of the RE work. If he understands business, he'll understand your proposal. Doing business with friends can be nice, it can also be a nightmare.I have been on the other side of ventures like these but not in real estate with family. Keeping it "strictly business" from the outset has definitely saved me a lot of heartache. I'd say do a couple of deals where you both are comfortable with it being well known to each party that these are "test drives" with clear and "fair" terms for each. If they turn out as hoped, pursue the LLC route Man Dy suggested.If it doesn't turn out as hoped, you can walk away feeling good and maybe give it another run down the road. Final suggestion would be to give a little if you REALLY want this to work and/or if you'd potentially need his capital down the road. Don't burn that bridge but don't give away your hard work if you don't need the capital.

Account Closed · Answer

Plus, you could deduct business expenses, like gas, some food, home-office shared bills, formation expense, etc. The $$$ you spent might be recouped as a tax deduction and perhaps some more expenditures.

Account Closed · Answer

@Mike Cowper This might be expensive, but it makes it you and him very well protected, you make one LLC (LLC1), he makes one LLC(LLC2), then make another LLC (say MC&Friend LLC) the last LLC will be holding the deal, where LLC1 and LLC2 are the shareholders/owners. That way, if anyone encounters trouble in personal life, it will not affect anyone. Sure, it costs $$$/year, but it would be worth it.Note: Trouble = unfortunate happenings like divorce, immobility, family control issues, accident, etc.

Mike Cowper · Answer

@Cal C. - I know, but I can tunnel vision at times and get stuck on a thought or opinion. Another reason I think a partnership long term may make sense and why I ask crazy internet people (like all of us on BP) for their advice. Especially from people with experience and knowledge as I try to get some of my own.

Jeremy Tillotson · Answer

@Mike Cowper congrats on striking a deal and best of luck.

Cal C. · Answer

Discussion and agreement between you and your partner is much more important than what some dude (like me) says on the internet! We just try to guide you as to what seems to lead to longer term partnerships.

Alexander Merritt · Answer

@Kyle J. nailed it.