Who Pays for Capital Expenditures?

[Mike Gorius]

Hi BP,

I'm learning more and more about multi-family investing, but I am having trouble finding the answer to a specific question. If I have a partner that wants to fund the downpayment on a small complex, but then do nothing except watch the cash flow in (I think this is called a general partner). Who pays for expenses that pop up? Examples being common things that take place with tenant turnover or larger expenses like a new AC or roof? I assume there are different answers for different companies, or if I am partnering with one person vs. a syndication.

A specific example is if this partner funds the down payment, we then split net annual rents 50/50, and when we sell or refinance the property he/she receives 60% of the equity and I receive 40%. The annual net rents includes setting 10% aside for maintenance. The partner would also receive and additional 8% of their downpayment when we sell or refinance in 5 years (non-compounding). If the cost of CapEx exceeds our maintenance reserves, who fronts the cash?

Any help is appreciated, or if someone can point me in the right direction to find the answer and learn on my own, that is appreciated as well.

Thank you!

[Michael Le]

It doesn't make sense for you guys to split the rents. You should be splitting whatever the net income is after all of the expenses and debt service. So if it is a month that has nothing breaking down you'll be sharing in a bigger pie. If there is an AC or roof replacement then there will just be less to split. You guys share equally in the profits and expenses.