Question on how to structure a partnership- (First time investor)

[Peter Carboni]

Hey all, 

I'm about to pull the trigger, with a partner (my best friend) on a house hack (fourplex) in a city near me in Massachusetts. I'm in an interesting position (i work on a cruise ship) and I'd love some insight on how to structure the partnership. 

Since I work on a ship, my partner on the deal is planning on living in the unit (don’t worry, it will still be my primary residence, no fraud here!) and taking on the role of property manager/full-time landlord in exchange for a stake in the property’s equity.

To be clear, I am the one putting down the capital to purchase the deal and she is the one who will be living in the owner-occupied unit for most months out of the year as landlord and property manager.

One last detail is that the properties we are looking at just fall short of cash flow positive since we are only putting 3.5% down. So she will have a cheap place to stay (well below market rent) and equity in the deal in exchange for her work as PM and LL. She could even take on a roommate for our unit and turn the property cash flow positive.

So my questions are:

1) What’s the fair equity split in this scenario? How much equity would you share with this partner if you were in my position?

2) Do you have any stories, experience, or resources you could point me to on how to structure such a partnership?

I would be so grateful to hear any advice you have on setting up sound partnerships so that everything is clear and laid out from the beginning and everyone feels compensated.

Any of your insight would be sincerely appreciated!

[Nathan Gesner]

Quote from @Peter Carboni:

It's hard to say without the numbers, but I suspect she's getting the better end of the deal. I don't have real numbers, so I'll use fake ones for the purpose of illustration.

You purchase a fourplex for $600,000. The apartments are 2bed/1bath and they each rent for $1,000 a month. You personally spent $30,000 (5%) to purchase the property. Your partner doesn't spend any money but intends to manage the property as part of the deal. 

Your partner doesn't spend a dime. She gets to live in the unit in exchange for her rent, valued at $1,000 a month or $12,000 a year. Put another way, you are paying her 25% of the rental income as an amateur with no experience, no knowledge of management, and no skin in the game. Meanwhile, a professional property manager would charge you 10% of the rent income. Do you see the problem?

You invested $30,000 while your partner invested nothing. They can walk away at any moment and lose nothing, while you would lose $30,000 plus whatever you've paid her over the years to manage the property. If you gain equity and split it 50/50, she's making money off your back. It's like working 40 hours a week and then giving someone half your paycheck because they are your "partner" but they haven't shared in the effort.

I think you're making a mistake. The value of her managing the property is almost nothing because she doesn't have any knowledge or experience, yet you're paying her significantly more than a professional would charge. She has no skin in the game and therefore no risk, yet you're offering to pay her the same you would pay yourself.

If it were me, I wouldn't split anything with her. I would give her a discount on rent in exchange for management, but it would be less than I would pay a professional, maybe 5% of the monthly rent? I would have a written agreement, drawn up by an attorney, that spells out my expectations for performance, compensation, equity split, etc.

This whole deal smells bad to me. I've seen good friends and family split over much simpler things, which is why many will tell you not to mix relationships and business.