How Do I Pay Out A Private Investor?

[Steven Barr]

I am looking to bring on a private investor for an apartment deal. However, I need to understand how to pay them out before I do so.

Example.... I put my own money down, and then use their money as well to buy a bigger apartment. We buy the apartment for $2mm, raise rents, and then make $500k on the appreciation.

We agree they get a % of the gain. I would like to 1031 my profits into the next deal. If they want to cash out,  can I just cut them a check and 1031 my portion? If so, are they then responsible for paying their own taxes after check is cut, or am I somehow involved in the tax payment process?

[Dave Foster]

@Steven Barr, There's several ways to do this.  But you're absolutely right to be planning ahead as each option has plusses and minuses.

1. Purchase the property as tenants in common.  When you sell each of you can take your % and do your own 1031 on your portion.  Easiest to sell.  Maybe more difficult to set up your management agreements and allocations

2. Create an LLC or partnership to hold the property. Each of you contributes cash in exchange for membership interest. Easiest to manage. Hardest to separate at the end.

3. Create a loan from him secured by the property but with no ownership.  They'll lose some ownership benefits.  But easier to separate at the end.

You can't just pay out profits without the ownership entity suffering a tax event that may or may not pass on to the former partner.