How to properly structure a partnership

[Leon Lee]

Dear BPers

I am considering to partner up with a friend on purchasing real estate properties. In general, I have perfect credit, low DTI ratio, but very busy with my full-time job. He, on the other hand, is relatively new to the local market, with poor credits but some cash. My question is what are the common ways to structure a partnership like this? One option that I am thinking is to purchase a turnkey property with both of our names on it, with him paying the downpayment, but using my credit to apply for the loan. We will be 50/50 on everything, including the ownership of the property, rental income and equity. Do you think this structure sound reasonable? What are pros and cons for both of us? Do you have any better ways to form a partnership like this?

Thank you!

Lee

[Greg Scott]

Lee:

You can structure a partnership however you like.

In this particular instance, I'm wondering why you want a partner at all?  If you are buying turnkey rentals, the whole point of them is they are designed for busy people.  Buy the property and put a property manager in place and you get 100% of the profit for very little effort.

If you still want to do a deal with your friend, look at the value of what he is providing vs you are providing.   A property manager will typically charge one month's rent for lease-up plus 8% per month.  (they all vary, but that seems pretty standard)   On a $1000/month rental, that is $1960.  Assuming your friend is providing all property management services, he has added that much to the deal the first year.  Meanwhile, you have contributed the down payment, working capital, any repairs AND, not have put your credit on the line.   Frankly that feels to me like you are bringing 90% of what this deal needs to get done.

Another thing to keep in mind is taxes.  It is a pain to pay a CPA to get the K1s right on a small deal.  You'll spend more on tax paperwork than is worth the hassle. 

Don't be afraid to take the plunge solo.  It isn't that hard.   I'm happy to chat more via DM.

Greg