Advice On Partnership for first BRRRR/ Buy & Hold deals?

Question

Hello BP Community.  Coming from the Chicago land area with a question in regards to partnerships.  If anyone has some sound advice in ways to approach BRRRR/Buy & Hold investing for two or more members It would be a wealth of knowledge for us at this time.  Suggestions to the following:

Do we create an LLC or is there some other form of agreement?

What is the best approach considering we are embarking on deal 1?

What is the typical cost for something legal in this nature to be created?

Where is it best to place the financing of the deal? (a members personal name or LLC)

Thank you in advance and hoping to one day return the favor with sound advice as I grow in this industry!

Craig Sloan · Answer

Good advice from @Kody Thompson.  If you're considering a partnership make sure you have a strong operating agreement.  People start partnerships with great intentions but they don't always end well.  Spell out as much as possible in the agreement such as percentages of ownership, how profits and expenses will be handled/distributed, responsibilities of the parties, what happens if one partner wants out or passes away.  There are a lot of things to consider.  A good attorney who deals with partnerships will be able to give you invaluable direction.

Jeff Piscioniere · Answer

@Jason Deangelis don’t be fooled into thinking it would be easy to secure financing in an LLC. That couldn’t be further from the truth especially as lending standards have now tightened and especially if you’re just starting out. It’s possible but it won’t be easy.

Jason Deangelis · Answer

@Filipe Pereira Great information.  Love the Ramsey reference.  It made me laugh.

Whitney Hutten · Answer

@Jason Deangelis Take heart in what @Filipe Pereira posted.  I've entered and exited out of a few partnerships.  One of which the deal did go sideways.  The saving grace is we had a JV structure in place that addressed all of the sideways issues, so we weren't arguing when it came time to exit.  Those were some weird stressful conversations that came up, but I'm so glad we had them!

One thing that might be a new piece of advice is to form an LLC for the property, then have two different LLCs for each partner holding interest.  Talk to a lawyer about that.  I mention it as you can then establish credit separately for each partner because you may want to do other deals outside this one partnership.

Lastly, securing lending could be problematic right now.  Explore your local options before incurring these costs.

Filipe Pereira · Answer

Dave Ramsey always says "the only ship that doesn't sail is a partnership" and I tend to agree with him. I was also involved in a partnership (that thankfully just got dissolved last week) and it didn't end well for either of us.

There are 4 things (amongst many others) that you should consider when entering into a partnership. Ask yourself what happens in the following 4 scenarios, and add them to your operating agreement.

1. Death - What happens if one of you die?

2. Divorce - What happens if one of you get a divorce? Does the partner's ex wife/husband get 1/4 of the business?

3. Disinterest - What if one of you lose interest? Is there a buy out? Do they just release their portion?

4. Drugs - What happens if one of you become a druggie? Who becomes the decision maker? Does the druggie forfeit their ownership and decision making rights?

Just food for thought before you sign up for a partnership!

Armin Nazarinia · Answer

@Jason Deangelis- I have done one partnership and did it wrong. I think the right partner is key and making sure your goals and expectations align. I spoke with a lawyer afterwards and they recommended an LLC with a good operating agreement which would have avoided a lot of issues. At the end of the day the things I learned are really related to good expectations for both parties. What do you expect your responsibilities will be and what do they expect them to be really need to be aligned.

I've also talked with many people now who have had successful partnerships and this seems key in their relationships. Who will manage the property, the rehab, is there an agreement for who is the realtor, who is bringing money and how much, what will the profit split be. What does the exit strategy look like? How are decisions made if they aren't in the agreement? If the partnership is going to be in an LLC where will that be held, who will do the taxes on it, etc. Lots of stuff I learned but really I agree with @Craig Sloan. I would have saved a lot of time and money if I had just hired a good attorney to help us through the agreement from the start. Treat it 100% like a business and don't make it personal and have agreed upon goals and plan with the partner. Best of luck!

Jason Deangelis · Answer

@Armin Nazarinia Best way to learn is through experience, right.  Thanks for sharing your experience on the issue.

Jason Deangelis · Answer

Thanks Armin.  I didn't account for fraud in my list of concerns.

Armin Nazarinia · Answer

@Jason Deangelis- I think that last question is best answered form an attorney. My attorney now suggested the same structure if I want to do a partnership in the future set it up under it's own LLC and essentially have that owned by a parent LLC.  (Disclaimer: I'm not an attorney and this is not legal advice). If the property is owned in the business and run like a business generally the only thing they can go after is the businesses assets unless one of you commits fraud or something then you become personally liable. I would highly suggest paying a good attorney for some time on this one as it will save you tons of headache later on.

Also I don't think partnerships are bad I just take them with a cautionary approach, I've seen some very successful ones as well and it all came down to expectations were communicated and agreed upon up front and covered multiple scenarios. I hope that helps. I am curious though if you have thought of going at this by yourself or if there is a specific benefit this partner brings to the table that you need/want as part of the deal?

Jason Deangelis · Answer

@Jeff Piscioniere Thank you for the cautionary advice.  Is there a better solution to assure personal protection from both partners in the deal and liability from tenants directed away from personal assets?

Advice On Partnership for first BRRRR/ Buy & Hold deals?

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