A new investor working with a silent partner to find a deal.

[Ryan Anderson]

Starting last summer I knew that I wanted to do real estate for the rest of my life so within a few months, I gathered every penny I could find and bought my first home which I am currently house hacking; I was instantly addicted.

Currently I am reading about real estate constantly, listening to BP podcasts and saving what I can for my next purchase but I am not raising capital fast enough.  I thought of getting a different job to increase my income, but the job I currently have gives me an incredible amount of free time and is ideal for someone like me who wants to get into rentals/property management.

So I started talking to as many people as I could and I found a partner who has a massive amount of capital but no time (he runs a company as well as manages 15+ properties).  I have a huge amount of free time and hardly any capital.

My questions are:

How can I structure a partnership that protects both of us for rentals?  (It seems much easier with flipping since once the house is sold everyone gets paid. Versus a rental income becoming passive income.)

Should I seek out a real estate lawyer to help me with structuring the partnership?

What books/blogs/articles can I read to have a better understanding of how to create a solid partnership that will last?

I thank you all for your help and I am excited to see where this will go!

[Jonathan Twombly]

@Ryan Anderson  This is a complicated area and you absolutely need a real agreement done by a lawyer.  You need a corporate lawyer, not a real estate lawyer, because you're dealing with a partnership rather than a real estate deal.  (Though you may want to wait until you've done a deal together to see if you really want to work with this person.)

If you're just starting out, you probably want this person to be actively involved, because his participation in the partnership will give comfort to lenders, and will help you satisfy the experience requirement most of them have.  (They look at the team's experience as a whole, typically.).

If your partner is putting up all the capital and providing his balance sheet so you can get debt, you should expect that he will take most of the upside on the deal.  You'd probably be looking at about 10% of the deal profits.  Your piece is likely structured as a promoted interest with a carried interest.  In English, that means that you participate in the cash flow profits according to the formula you agree on (the promote) and then you get some agreed portion of the sale profits (the carry), after all expenses are paid and his investment capital is returned.  Typically, if you find the deal and manage it, and he is funding it, he gets a preferred return of 7-8%, and if there's money left over after he has been paid, you split it 50/50, 60/40, or whatever.  If you are taking the active role, maybe you can negotiate an acquisition fee at closing and an asset management fee while you run the deal.  But the more active a role he plays, the less you can expect to get.