How to be an "equity partner"?

[Diane G.]

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]

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 Requirements
1 - Must be all cash deal at the start
2 - Must be a big cash flow deal (big is defined by all parties involved).  Expenses must include a PM
3 - 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.