How to structure a partnership

Question

Hello!I’m a Licensed Real Estate Broker in the State of Oregon, as well as a Salem Resident.I would like some information on how to structure a real estate partnership. I'm going to use a credit partner to bring the money and credit needed to purchase a multifamily investment property to the table.In short, my plan is: 1) Find a good deal on a distressed multifamily property.Present the numbers to my partner, and if we agree it's a good investment, we would purchase it.2) Rehab (fix up) the property using a good contractor and my dad as well (my partner would pay for the rehab costs as-well).3) Rent out the property, with me living in one of the units. (Paying back a set monthly fee to my partner using the rental income)4) Refinance the property after 6 months to a year for 70% of the ARV, or after repair value. We would make a profit in our pockets if done correctly because I increased the property's value.5) Pay off the original loan, and start a new loan with lower monthly payments. (Still giving my partner that set monthly fee).6) We would build equity and passive income from a rental property. So, my partner would purchase and refinance the property, and in return get set monthly payments from the rental income, and when we refinance, the original loan paid off.I would find the property, fix it up, rent it out, and have a place to live for free.I’m not sure how to structure this partnership, maybe an LLC, but need more info on what would be best. I also need to know what contracts are needed, so we can make the partnership legal.How have you structured your partnerships in the past? Did you hire an attorney or lawyer?Thanks for taking the time to read this, and any advice would be much appreciated,Megan Harper

Charles Seaman · Answer

@Megan Harper I agree with Account Closed. It's not worth saving a few bucks on legal advice because it could cost you more in the long run. However, the first thing that you'll need to decide is if the partner will be a debt partner or an equity partner because this will impact any legal advice that you receive. You should have a basic structure in mind and an attorney will help you make it legal. So speak with the partner to find out what they want from the deal and then use that information as a starting point.

Account Closed · Answer

This one requires a real estate attorney in your local area.

Mike Smith · Answer

My guess is an LLC, which is easy to set up. However, the operating agreement of the LLC will be the important part. You have a somewhat complicated and messy game plan set up. It will be extremely important that each party is paid "market rate" for whatever they are providing, be it capital or labor.1. When you look for, analyze and finally find property, that is typically "wholesaling". I'm not familiar with market rates for wholesaling, but you can easily find that on bigger pockets.2. Your partner is an investor in a basic "fix and flip" operation. Your partner should receive adequate compensation for loaning the money and the potential risk of loss. I'm not exactly sure what market rate is for this.3. You and your dad are working as rehab contractors. You should receive market rate for this. I would highly recommend getting several bids for work you are going to perform and using a bid from a 3rd party to set market rate for rehab work.4. You are renting one unit from the investor. You owe the investor market rate rents.5. You are performing property management on the the other units. The investor owes you market rate for property management. That is typically 7% of gross rents in our area. Your area may differ.Your operating agreement needs to identify potential problem areas and specify solutions:What if you lose money on the fix and flip? Does the investor absorb all of the lose or do you make up a portion of the loss? What if your rehab goes over budget? (100% likely on your first deal, going down by a few percentages on each subsequent rehab, as you learn from your mistakes)What is your rehab goes over schedule and there is a loss of budgeted rental income? (100% likely on your first rehab, going slightly down..)What if either you or your partner want out? How do you unwind the partnership that is fair to both parties and definable in advance?I applaud your hustle in working a deal like this. Just spend some time up front to keep your dream from becoming your nightmare...

Nathan McIntire · Answer

Great post @Megan HarperLegally, there are many ways to structure the partnership for your real estate business. Like people have stated already, I would check with your local real estate attorney first. And also keep in mind that a partnership is very much like a financial marriage.

Megan Harper · Answer

Thank you! I will make sure to get one.