How do I work with a partner in a deal?

Question

I have an interest in buying property in the Sacramento area. Many of the friends I have are looking to invest money into a deal with me, which would be helpful to increase my opportunity and start looking at multi family properties. Does anyone have a recommendation on how to bring a partner or multiple partners into a deal? Do we get a loan together? Should I just have them provide liquid cash for renovations? Is there a standard for percentage return if they do provide liquid cash?

Any information here would be extremely helpful. Please share any personal experiences you've had with this as well. Thank you!

Jennifer Wilson · Answer

I agree with Melissa and Karl that you should form an LLC for the property/project. In addition, before you purchase the property, make sure you have a solid contract in place to ensure that everyone understands their portion of the total investment, what is expected of them, what their potential profit split will be, what will happen if you refinance or sell, etc.My husband and I have purchased two properties with outside investors, but we went about it a little differently. We ended up doing a syndication where we have investors, but they are silent partners. They contributed funds into the project in exchange for an ownership percentage of the property. They then get that percentage of the profits each quarter.We went about it this way as our investors either didn't have much experience in real estate investing or were located far away from the property. As my husband and I are the more experienced investors and the ones living near the property, we are the ones that found the deal, analyzed it, purchased it using our own credit, and run the day to day operations and any renovations. Without getting into all the details of how it works, I'll just say that for taking on that additional risk and work, we are compensated for that in addition to our percentage of the profits.So, if you think that your partners may not be able to be as hands on as you with the property, this may be an option! Good luck!

Jennifer Wilson · Answer

@Karl McGarvey The majority of our investors were not accredited. Our syndication attorney had a form for all investors to indicate whether they were or not. If they weren’t, they had to sign off that they were either “sophisticated investors” and give educational and/or background experience to show they were competent adults, or indicate that if they had used a professional advisor. Our attorney knew our plan to help friends and family, so it wasn’t too strict. @Austin Guzman My husband and I are the ones backing the loan, essentially taking the risk. Although we purchased the property in a brand new LLC, our personal credit and other business deals were also taken into account with us as the guarantors of the loan.In regard to investor money and raising funds, we acquired the funds prior to closing. We knew what property we wanted, so we knew how much we needed for the down payment, closing costs, and how much money we wanted in reserves for capital improvements. From there, we started reaching out to investors with the business plan, property info, and to ask for money. We had all the funds we needed to purchase and start running the property before we closed. The closing essentially shut down the opportunity for other investors from getting in.

Karl McGarvey · Answer

We applied for a loan jointly. Usually we try to leave the banks out of it and push for seller financing (so many benefits to this). But yes, both of our names are on the financing and in the end we actually push our properties to an LLC so the company name ends up on the assets.

Karl McGarvey · Answer

There are MANY ways to skin a cat. My current partnership is an equity split where each partner is responsible for an equal share. We operate under an LLC with a well written agreement so everyone understands their roles, responsibilities and financial contributions. There are many that don't recommend this type of partnership and it does require ALOT of trust. But I like the fact that my partner and I both share the same goals and will profit or lose based on our team effort.You could do a partnership with the other partners in a limited capacity, but again, you need a rock solid agreement. Returns are completely negotiable, just make sure you don't give away all of your profits just to attract partners. Highly recommend getting a good RE lawyer for drafting documents to keep all of your ducks in a row anytime you are working with others to make sure there is no confusion whatsoever.

Karl McGarvey · Answer

@Austin Guzman I don’t. Best idea is to call a lender and discuss with them.

Karl McGarvey · Answer

@Jennifer Wilson great feedback. Thank you!

Austin Guzman · Answer

@ Karl McGarvey Do you know what average interest rates are on these LLC loans?

Austin Guzman · Answer

@ Jennifer Wilson Thank you so much for the info! I'd like to ask one more question regarding the syndicators in your deal. Was it that you purchased property using your own credit then brought in syndicators to fund improvement? If not, how did they play a role in those deals?

Karl McGarvey · Answer

@Jennifer Wilson doing the syndication did you have to make sure the silent partners were accredited? Also, @Austin Guzman if you do go the LLC route, be prepared to get creative and pay for financing. Having a LLC changes what loans you are able to use and the interest rates are most likely going to be higher.

Melissa Barnard · Answer

Hey @Austin Guzman, I would form an LLC with the friends that want to invest and all get pre-approved. That way you guys can all be on the loan and put the house in the LLC's name. Sometimes it is difficult to invest with friends so whatever you do, make sure you have everything in writing for each person's contributions and stake/role in the company.