Partnering in a Deal

[Ephraim Teke]

I often hear the phrase “you can always partner with someone who either has money or has skills in a deal when you don’t have both” on BP real estate podcast and other podcasts. This phrase is usually followed by a certain percentage or ratio that the partners use. The question I have been asking myself is What is the content of the partnership and how does it work? 
My initial thought was the definition of roles such as one person taking the role of property management (in the case of rental property ) and the other probably taking care of maintenance, but I get stuck with how the deal is acquired. Who holds the loan (if the property is not all cash buying), and the deal purchased using the partnership or one of the partners?  

Please, I need your thoughts.

[Scott Mac]

Hi Ephraim,

In the simplest form, lets say you and your new business friend Bob think that a house over on 6th street would make a good rental, but it needs some work.

It costs $100,000 and you guys intend to use a paid property manger.

You and Bob agree to each put in $10,000 ($10k + $10k = $20k down payment) and split the loan fees equally for the 80% loan, and split the renovation cost equally to make it rentable.

In this instance, it makes sense that both you and Bob are 50%/50% owners of the property and should each get 50% of the monthly profits (and or losses) and share any needed extra expenses incurred during ownership 50/50.

Now if only one of you is going to put money into the deal and the other is going to provide sweat equity, depending on the amount of sweat equity needed that MAY determine the seat equity cut (but if the money partner wants a bigger percentage the sweat partner will have to decide if his efforts are worth what's left over).

It's best to pay an attorney to help you figure out the wording of this. The attorney will probably have a questionnaire for you to fill out regarding this (the questionnaire will be helpful in deciding who gets what).

Note: A good way to go about this is to think about whats FAIR for the other guy in the deal, and then what FAIR for you in the deal vs trying to put the screws to the other person (because partnering is something you can do on other deals with them over and over vs just one time.)

Some people use LLC's to do this, and in some areas they use deed language to do it. Follow your attorneys advice on whats best for you.

Good Luck!