What is the way to structure a 5050 partnership Rental Portfolio

Question

I am partnering with a friend of mine to build a rental portfolio. We are going to use the BRRRR method, but instead I will be the one to Finance the deals. Hard money loans have relatively high interest, so if I can fund the deals, we would save a lot on that. Since he is the one doing the work, does he take a management fee? Since I am the one financing the deals, do I charge the company interest? We want to structure it so it will be fair so neither party feels taking advantage of.

Max Gradowitz · Answer

You really should consult an attorney who has experience with entity and partnership formation.

Frank Chin · Answer

I've been in several partnership deals. It's structured 50/50. It would be easier and simpler if both contributed equally and jointly, such as financial and work. But in my case, there's  one where I contributed financially, and the partner contributed with knowledge of the market, and work. In the other, the partner contributed financially and I did the work.

Once you start counting pennies on what is spent, hours and minutes spent working on the deal, to do and equitable split, you're doomed to arguments and disagreements. In these deals, one partner supply the capital, up to a certain amount, the other contribute work and both agree to certain objectives.

I was looking for quick flips to make a quick profits, and in NYC, it's rather hard to do. I found a real estate agent with ears to the ground, a network of lawyers helping homeowners on foreclosures. Says he often runs across leads where clients had to unload the property quick, and he's a group of investors with ready cash and credit to jump in and snap it up. I had the cash and credit, ran around for two years and found no deals. So we agreed that if he could find such a deal, I'll be happy to do it. I'll finance it, and we split it 50/50.

True to his word, he came across such a deal in a month. I would put $10K to tie up the deal, another $15K for fixup, and the flip should generate about $50K to $60K in profits. We would tie up the property, the seller continue paying mortgages, and completion in 3 to 6 months. And it was also agreed that he only collects his 50% if the flip completes. If not the backup plan is he gets nothing and I'll do a buy and hold.

What finally happened? We did the rehab, spend about $15K, and paid $10K into escrow. Tied up the property for $70K and sold it for $129K. Took 9 months instead of the 6 months planned. Buyer got the mortgage and we had a closing date. I was all ready to complete the flip. Then it happened. The seller claimed he lost his job, cancelled the planned closing, and the mortgage company (buyer's) notified.

Told my partner I have to go to plan B, buy and hold. He's a real estate agent with connections with mortgage companies and I got a mortgage quickly, but based on the $70K contract price, not the $129K sales price. Further told my partner he gets no cut for his work because the flip didn't complete and he agreed. But there one angle we didn't consider. I held on to the buyers 10% escrow of $12,900, and after some back and forth with the buyer attorney, kept half and I agreed to give half of that to my partner.

So yes, I go stuck with the property since this happened, in 1984. How did I do? It appreciated from my original purchase price of $70K to $425K this year. It currently cash flows at $1,500/month, with the mortgage paid off but more if I charge market rent. However, I went through break even cash flow the first five years with high interest rates in the 80's.

With the mortgage paid off, appreciation, and cash flows through the years, believe I made over $500K, where I originally invested $25K. I could say real estate pays off if you take the long view.

The other deal with partners involve my mother in law. She had lots of free cash, and figured investing in real estate is a better bet than CD's. What she did was to pay the down payment, I do the work, like rehabbing, renting, and collecting rent. I even pocket the cash flow because we concluded we cannot predict rent collections and amount, so instead of going 50/50, if there's negative cash flow, I cover, if it's positive, I get to keep it. The only 50/50 aspect was with the sale of the property, that would be split 50/50. We finally did sell, 2 properties, after some 25 years, but had me hold on to the proceeds.

There you have it. I did partnership deals, but I avoided the nasty details of counting pennies and minutes.