Looking for advice on partnership structure

[Brett Holmes]

Hello all, I am needing some advice on a partnership structure that I was just presented with. The potential partner here is a local wholesaler/agent and he is bringing the deal. This means I am bringing the money, which is coming from a HELOC on my primary residence. The intention is to buy the property, all cash, for $32,000 and refinance, pulling the $32,000 back out. What he has proposed is setting up the partnership where equity will be split 60/40, with him getting the 60%, but splitting cash flow 50/50. He will be in charge of managing the property, where my role will be more hands off.

With this being my first real estate deal, I am looking for any advise that you all may have.  Is a 40% equity stake normal, or a good or bad deal?  What are some tips or pointers to look out for?  Since I am the money man, what happens if something falls through with the refi or we run into a money issue early on?  Is it all on me and how do I protect myself?

Thanks in advance for any input on this topic.

[Mitch Coluzzi]

I am one of those guys that skipped the partner piece because I do not trust them (them being anyone), so my opinion might be biased but... to me giving up over half the equity seems insane!  It's your money, his deal.  Unless it's a sure thing (and I have yet to see one of those) and he is an experienced contractor putting up a lot of sweat/time to do the rehab, your money should be worth SIGNIFICANTLY more for the risk you are tossing at it.  Again, in my opinion...

How seasoned is this wholesaler / agent? Does he have any property management experience? Why is he offering you 40% instead of turning to a bank / hard money lender at 5-12% APR plus a few points? How much do you need for rehab? What's the ARV? What bank is going to lend you on this and what are the terms? Who are you defining expenses and who keeps track? Any rules in place on contractors / vendors? What safe-guards do you have? And most importantly... do you trust this guy with $32k against your primary residence?

Don't blindly assume you will be able to pull the $32k back out of it... Generally, you can find a bank willing to loan 70% of ARV OR 90% of hard cost (purchase + rehab, no holdings) which begs the question of... why isn't he doing that?

From a protect-yourself standpoint, you need to seek legal counsel on this one but here is my non-legal opinion. At minimum, an LLC with a basic operating agreement needs to be in place along with lease terms defined + mutually agreed upon up-front. Outline all property management fees / expenses and who will handle + how things will get repaired.