Structuring this partnership

[Robert Dabicci]

Hello, I know every partnership is going to be different and I have to assess my individual case. That being said I'm interested to see what other more experienced investors think so I can make sure things are fair for my partner and I.

The details

This is the first real estate investment for both my partner and I. Its a 100k 4 unit that we expect to cash flow $750. It has 3 updated units and 1 that needs a new kitchen, floors, and some wall and ceiling work.

What I bring to the table: I am financing the deal. I am putting 25% down and securing the loan. I also found the property and I am responsible for dealing with closing and researching and implementing all the great information here on bigger pockets and elsewhere that makes for strong real estate investments.

What he brings to the table: He has decades of experience in home repairs and installations. He will be responsible for rehabbing the distressed unit (labor savings 5-10k) and more minor repairs in other units and future updates if needed. He also brings knowledge with his ability to diagnose maintenance problems and provide solutions that I would otherwise probably have to hire someone for. He walked property with me and provided assurance I needed to put in a quick offer without taking excessive time to evaluate area I'm not versed in or try and hire a contractor to walk property with me.

My partner proposed that I get an annual 7% return on my down payment off the top of the net cash flows and retain 100% of the initial equity from down payment and then we split the remaining cash flows and equity gain 50:50.

To me this almost emulates a 3 party deal with a money man (7% annual return interest only off top) , a real estate investor (50% equity gain and 50% remaining cash flow) , and a contractor/repair man (50% equity gain and 50% remaining cash flow) except that I take on the role of the money man and the real estate investor. 

I tend to think people will think cut out the partner and just pay for contractor work, but this is someone I know I can trust in their assessment and in their work. This is my first deal and I feel like I'd take comfort in knowing I have someone with a vested interest to rely on for these tasks. In addition, I would have had a much more difficult time assessing the property quickly and getting in an offer before another buyer.

Sorry for the long post. What do you think of this proposal. How would you change it? Thank you.

[Lynnette E.]

I'd go with hire a contractor, don't bring him into the deal.  

But since that is not what you asked, you need to do a written budget.  Otherwise is it easy for someone to take all the rent as cash flow and want to split it.

You need an agreement on how much of the money is set aside each month for taxes, insurance, maintenance (even if he does it with free labor, parts cost too), CAPEX (same, supplies cost), remember he cannot do everything, what if the sewer collapses or the septic tank needs to be replaced, some things are best hired out. Put in the plan your estimated time of replacement of major system components such as roof, HVAC, appliances, plumbing, etc. That should let you know how much you need to put in the CAPEX each month to meet these expenses before they arrive.

The written agreement should include how long or how many hours of free labor he will supply as part of the deal, and how many hours of labor you would supply doing the taxes information collecting, renter issues, who deals with collecting rent, evictions, interviewing and choosing renters, maintenance calls, etc. 

The agreement should state how long you anticipate it will take to recover your down payment and interest.  It should state how long you will both agree to hold the property, how it will be sold, and discount if one of you want to buy. 

What is the consequence for you or him not keeping your part of the deal.  Say he transfers to China and can not do the maintenance, if that happens and you then contracted out the maintenance, repairs do you deduct these expenses from his profit when the property is sold?  

You should also have a detailed written plan with the costs of material for the renovation and maintenance you are planning and agreement on if it comes from the rent profit or someone' pocket, and a schedule to do that work.  

There is a lot more to a partnership agreement that how much money each partner gets.