How to be an "equity partner"?

Question

Not sure if I would ever collect enough guts to become an equity partner, but kind of curious about it.... So thank you pros for enlightening me....

1) how to ensure the return OF your money

2) how to ensure the return ON your money

3) have you ever partner with some stranger, or would you only partner w people you know 10+ years in life?

Joe Villeneuve · Answer

We do this all the time.  It's probably my #1 strategy now, because if you set it up correctly, everyone wins.  To set it up correctly, you need to do the following:

Entrance Requirements1 - Must be all cash deal at the start2 - Must be a big cash flow deal (big is defined by all parties involved).  Expenses must include a PM3 - Initial cost (cash in) must be no more than the maximum % of ARV needed by the initial REI (seller) that would leave that REI enough equity to keep enough CF/M to make it worth it for them to stay on as Deal Manager

Exit Requirements (or Entrance from the Buyin point of view)
1 - Splits of available (see Entrance Requirements #3) equity must be divided up evenly
2 - Cash flow is split the same ratios as Equity splits
3 - Property is held in an LLC, and the Equity Splits are actually membership splits of the LLC...not the property, because...
4 - The LLC is the asset, and income source, for the LLC

Since I started doing this, I find myself filling orders more than trying to fill Equity Slots...especially with my Out of State REI/Partners.  Michigan is a fantastic State to buy TurnKey, but the OSI is going in blind...and ultimately responsible for everything, once the TK Seller turns the property over.

Doing it this way, from a lot of experience, the TK Seller has lifted that last obstacle because that Seller has a vested interest in the deal.  They not only have a percentage of it still, but that percentage represents Management Responsibility.  I can assure you, I don't look for deals with high cash flow...and high maintenance.

This, if set up correctly, is a BIG win/win situation for all.

Chris Grenzig · Answer

@Diane G. maybe I was a bit harsh, but people do need to understand no investment is a guarantee/ensured. I'm sure you know that, but it is important to make sure. However, if the proper due diligence and research is done it is actually quite simple to have a good investing experience. I agree with @Jeff Wallenius that transparency is absolutely paramount in any private investment. I guess myself, I am a fairly conservative investor/underwriter and like to do my homework before anything else. Definitely didn't mean to scare anyone lol.

Jeff Wallenius · Answer

@Diane G. it's a mixture of things but I truly believe that transparency is key. Investors should know every detail when investing their money, where every dollar goes, access to bank accounts and all documents, etc. When investing with someone you have to spend time to vet their processes and them individually as well. @Chris Grenzig nailed it when he suggested starting slow and building that amount of trust. This is what we do with our investors and it's been quite successful. I blogged about investing in a syndicate and it also holds true to individual deals as well. Link is below. @Joe Villeneuve said it best, has to be a win/win!

What to look for in a investment partnership

Best of luck!

Diane G. · Answer

@Chris Grenzig

Thank you for your post... wow, that is really not very assuring, is it? Lol...

@Joe Villeneuve

Can you elaborate your #3, as well as your very last sentence on "high CF, high maintenance'.... I did not understand those two...Thank you

Joe Villeneuve · Answer

Yes

Larry Fried · Answer

@Joe Villeneuve  If I understand your example correctly.  The property is purchased and rehabbed for $70,000, but you have four investor shares at $20k each for $80k.  So in addition to holding 20% equity in the property and cash flow, you also retain/profit $10k upfront.  Is that correct?

Joe Villeneuve · Answer

@diane g Not a problem

Diane G. · Answer

@Joe Villeneuve

Thanks Joe, give me a couple of months until I get to exercise that stock options of a company that I used to work for....I will ring you up...Thanks in advance... I appreciate your time and expertise on this.....

Joe Villeneuve · Answer

The LLC is a pass through income. The deductions are distributed the same as the income. The LLC is on title

Joe Villeneuve · Answer

@Diane G you've got my number. let's talk

How to be an "equity partner"?

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