Real Estate Partnership Questions

[Annie Drommond]

Real Estate Partnership Questions

We are starting our first partnership on a BRRRR rental property. I know we should have put a partnership agreement in writing at the beginning, but it was a fast turn to close on the property. We need help to understand:

1. 1-What percentage ownership would you suggest for each partner?
2. 2-How would you suggest compensating for management if we are currently still self managing all of our own properties?
3. 3-Do we need an LLC?
4. 4-We are ready to do a cash-out refinance. Who should hold the mortgage?

My husband and I currently own 7 rentals properties. In the spring of 2020 we purchased our 8th, a single family home, with my sister and her husband. At the time, we were temporarily unable to use our own lines of credit to finance it. Our private lender fell through, so I approached my sister about loaning us the money. She said she could, but that she preferred to partner. Although we really weren’t looking for a partner, as my sister, I had a hard time telling her no. She wanted to start investing in rentals. They rented out their home for a few years during the recession, but otherwise have no experience with rental properties. Having never partnered with anyone before, I feel lost on how to best structure everything. I feel like I need a mentor on this one, but don’t know anyone. We’ve just learned ourselves, by ourselves, one house at a time. Here’s what I need help with.

1- What percentage ownership would you suggest for each partner?

I found the property, spent months getting the contract secured and working with the owner, lenders and the title company. My sister ended up coming up with the 25% down payment for a regular loan during the last month of closing, when my private lender fell through. We paid her back half of that 4 months later when our HELOCS were again available. We both put in about equal amounts of sweat equity (along with our kids) during the rehab. We provided all of the sub-contractors, real estate knowledge, tenant and property management experience. To sum it up: money in is 50/50, rehab work 50/50, property management is me and finding the property was me. What is a fair split of the long-term income?

2- How would you suggest compensating for management if we are currently still self managing all of our own properties?

My sister wants to manage it so that it can be a 50/50 partnership to compensate for us finding it. However, I will still need to train her and provide her with our sub-contractors contacts. This feels like a lot of work on my part. It would be easier to manage it myself since it is a residential property and is in our workflow of the other properties already.

3- Do we need to setup an LLC? Do I need a real estate attorney to set up an LLC and this partnership? If so, do you have recommendations of one that works with investors? We are located in northern Utah, and so is the property.

4- We are ready to do a cash-out refinance. Should we put the loan in only one persons' name and then deed if over to an LLC? All of our names? Have my sister hold the mortgage? In the name of an LLC if even possible with a lender?

Currently the mortgage is in me and my husband’s name, along with my sister’s. We had to add her near the end of closing because my loan officer was rather new and didn’t help us set up the documentation properly to prove that she was a partner and not just loaning us the money. We had switched lenders to save money, but it cost us in time, stress, and we almost lost the deal. Lesson learned: stick with an experienced lender :)

Thank you for any suggestions. If there’s someone looking for a money partner, and has experience with partnerships, hit us up in a few months when our refinances are done!