Business Partnerships for Single Family Homes.

[Kevin Dolan]

A colleague and I are starting a business partnership to purchase and manage single family homes. And we need advice.

I am creating a landlording/management partnership with a colleague that I trust. He is fair, honest, hardworking, smart, and a good communicator. We consult one another about our current single-family rentals. He owns two, and I own one. And in our desire to expand we’ve decided to team up.

We've both had success as landlords. But we don’t have much experience about the ins-and-outs of business contracts. Can anybody who has done this kind of thing offer some advice on how to start? What pitfalls to look for? How do we put both of our names on the title for the next single family home that we acquire? Should we form a corporation? Does anybody have exit strategy ideas in case there is a problem? At what point should we involve lawyers, if at all?

Thanks!

[Leon D.]

"He is fair, honest, hardworking, smart, and a good communicator." Famous last words. You're describing him now, as a coworker/colleague. No guarantee that's how he'll be as a partner.

How to start, to protect both of you:

1) Do not buy the property in your names. Do not share title. The partnership's entity (LLC, corporation, etc) should have title to the property, not you as individuals. In turn, each of you would have an undivided share interest in the entity. You will want to put a gun to your head, or your partner's as the case may be, if you share title and something goes wrong with your relationship.

This is a lot like dating and marriage. Not everyone you date, you would want to marry. Sometimes marriage is a mistake. Sometimes it's great for a month, a year, forty years, and then goes bad. Don't be romantic about this, it's business.

2) Sit down for a few real, heart-to-heart talks about what you each wants out of this, and what your expectations and goals are. From each other, from the business. You should each write it all down, make sure there's no misunderstanding between you both.

3) Each of must hire a separate attorney. Don't wait on this. Your atty needs to look out for your best interest, and his atty likewise; there will otherwise be a conflict of interest if you both you the same person. You draft the operating agreement that describes things as you understand them, and then hand it over for your partner and his counsel to review. There will undoubtedly be changes. A few of the things to consider, since there is no such thing as too much detail:

a) Make sure management roles/authority are well documented. To that end, a 50-50 split is always a bad idea.

b) Exit plans, should one of you want to leave/dissolve things, or one of you dies or is otherwise incapacitated.

c) The ability of a partner to sell his interest in whole or part to someone else (maybe a complete stranger).

d) Dispute resolution. Fights will happen, you're fooling yourself if you think it won't happen to you.

e) Form of the "partnership": LLC, LLP, corporation. You may each have reasons for wanting something different from the other.

Good luck.