Partnering Multi-Family Rentals and Paying Your Partner

[Todd Sullivan]

Hello All,

I know, I bet this question has been asked before, I searched and couldn't really find an answer though to my question...so here goes!

I'm looking to mainly purchase multi-family (even Single-Family) properties,  and I don't have a huge amount of money, so I'm looking to partner up with someone who has money to invest.  I bring the deal, they fund it, I manage the rehab/turn, we get tenants and money is made.  I understand that part of the formula.  What I'm not solid on are the strategies to paying a partner back and taking over the deal.

Can someone please explain some strategies that are available to fuel that plan? 

Thank you in advance!

[Owen Thornton]

Originally posted by @Spencer Gray:

I would treat it no different than a large apartment syndication. I would find a way to come up with at least 10% of the equity needed for a deal so you are truly a partner with skin in the game. I would include in the operating agreement a simple preferred return (8%+-) paid to all partners, 70% of remaining cash-flow goes to the partners, 30% goes to you. After a sale or refinance all cash goes to pay all partners their capital, any remaining profit is also split 70/30. You can change the numbers, but that is a very common way to do it that most attorneys and sophisticated investors will be familiar with. 

As far as "taking over the deal," that's a little more complicated. Many investors don't want to be taken out of the deal only for you to make more profits while you keep holding - it just doesn't seem like a partnership, more transactional. However, if you're upfront about it, and they can still make a good return, they might not care. You could offer that they are "out of the deal" or their share of the profits is significantly reduced after a certain negotiated return threshold, say a 20% IRR. Or you could simply buy them out at some point. Keep in mind proceeds for a refinance usually first flow to return capital. If you kick them out of the deal after only getting their capital back, they may not be too pleased with only getting cash-flow and no upside.

(Not legal or financial advice)

 I enjoy this comment. I was considering bringing on multiple partners for smaller (500k or less) deals. Whether debt or equity partners, I think this strategy is an interesting and fun one.

Do you by chance have any clue about how many JV partners you can have, or the legality on how to "ask, without advertising?" That seems to be a major hurdle without hiring a PPM lawyer...