How to structure a 50/50 deal, with partner buying property with cash?

Question

Gosh I have so many questions, I don't even know where to begin!  First off I apologize if I posted this in the wrong forum--I wasn't sure which area this should be posted.

I have a friend with a lot of cash that he wants to use to start buying properties, and he wants my help because I have some experience with managing rental properties.  Plus I would like to start acquiring more properties as well.  I have nothing saved up, and a lot of debt, but still an excellent credit score.  Anyways I found a property that he could buy straight up with cash, but I am trying to figure out how to set the whole thing up.  And I know there's obviously no "one right way" to do this--just some guidance would help!

Say we want to go 50/50 on the deal... how would we structure this to make a 50/50 partnership, if he pays the $50,000 to buy the property?  Would it make sense to create a $25,000 loan that I just pay back to him?  Is that how partnerships usually work, when one person provides all the capital/down payment?  What would be a good interest rate and length for this loan to pay him back?  Should we set up an LLC in both of our names, and buy the property with the name of the LLC?  This property would also require about $50,000 in rehab.  Can we still get an FHA 203k rehab loan, if the property is purchased with cash?  Or would it make more sense to get a construction or other loan to rehab the property?  In this case if he bought the property with cash for $50k, and I got the rehab loan for $50k, would that make sense to call it a 50/50 partnership??  Obviously we would get this all in writing.

I hear and read so much about buying properties using money from partners/investors/friends/family, but it seems like nobody explains details as to how they actually set these things up.  Just looking for any advice!  Thanks!

Troy Fisher · Answer

First draw up what you guys want to do each in the business then and what you are both going to agree to do and then take that paperwork to lawyer who specializes in Partnership Agreements and Real Estate.  Mine gave me almost 100 question survey to fill out so that they could draw up the agreement for us.

Here's an example: http://www.smallbusinessnotes.com/managing-your-bu...

Also think about going to your local SCORE office and sitting down with someone there to help you guys work out what you want to do.

Ryan Harthan · Answer

You two can obviously both make decisions but the managing partner generally handles the day to day operations: collecting rent, evictions, tenants, repairs, etc.  You probably both want to look at deals when you're acquiring them at least in the beginning but in a long lasting relationship generally the managing partner will take over most or all of the business transactions.

Darrin Wesenberg · Answer

@Troy Fisher thanks for the quick response.  yeah I mean we have sat down and talked already about our strategies, goals, ideas, etc.  i.e. we know what we want to do with the property.  it's just that neither of us have business backgrounds so we are just wondering how to even BEGIN to "structure" this like from a business standpoint and financially, if he buys the property with cash, and yet we still do this 50/50.  like, how do I pay him back?  just looking for tips from people who have done this before!

@Ryan Harthan thank you, that's very helpful.  I had no idea about having an equity partner and managing partner.  that seems like a good idea.  so that would be simply for making big decisions, with the profits still being split equally?

I realize I asked a lot of questions, so if anyone has any advice for even one of my inquiries that would be so helpful!  this forum is filled with such knowledgeable people!

Ryan Harthan · Answer

You can have one partner be an equity partner and the other a managing partner.  Also, I would recommend a 49/51% split.  In the event that you can't agree on an issue one person can override the other and prevents a stale mate on important issues.  One person is the investor bringing the capital for the transaction(s) and the other bringing the business knowledge to set the deal up and manage it.  Profits being split between the two.

Troy Fisher · Answer

You are absolutely right.  There is no "one right way" to do this.  You need to sit down with him and talk.  You don't get married with out talking to your spouse and going on dates and woo'ing them, right?  (Apologies if you did!)

The two of you need to sit down together and talk about your strategies and what you bring to the table.  What he thinks the partnership should be, and what you think the partnership should be.  Talk about what the plans with the property is and how you both think it should. KEEP NOTES!

Go home after the date and flesh out a couple of different proposals that you feel like would solve both of your problems. Get back together and talk about those proposals.