Real Estate Professional · Santa Rosa, CA · Member since 2017 · 5 posts · 0 votes
Hello, Big Pocketers. I am a newbie; no deals yet, but learning. I greatly appreciate your collective information.
My question pertains to a hypothetical partnership and financial justification for both sides. Managing partner does all the work (finding, rehabbing, managing) on a $100K property for 30% ownership, and an passive investor provides all the capital for 70% ownership. Partnership is buying at wholesale provided by the managing partner. Retail value is $110K.
Upon initiating the partnership and purchase of the property, does the value to the managing partner hit $33K (30% of $110K) and the value to the capital partner drop to $77K, or is there a better way of structuring the capital contribution?
Partnership divides the profits 30/70. Rent is $2200/mo,net profit 50%. Managing partner nets $3,960/Yr, Investor nets $9,240.
How does one do the financial justification on behalf of the investor? Pre-appreciation equity to investor is $77K. Annual income is $9,240, so it appears that it takes two years to recoup initial investment. Is this normal, or is there a better way to structure a deal like this?
No, the managing partner and the limited partner's capital do not immediately change upon the start of the partnership. The managing partner's capital will be $0, and the limited partner's capital will be whatever cash is put into the property.
Each partner's capital account will change as income or losses are incurred, and when additional contributions or distributions are made.
While the entity will need some capital contributed to it directly to provide adequate capital (for liability protection purposes this is very important), another possibility is to structure the deal so that some of the money being contributed by the investor is in the form of a loan.