Partner Financed our multi when can I take cashflow?

Question

This is something that should have been discussed initially between us but I'm curious how some other partnerships are structured.   Our agreement is that he is the preferred equity partner and I am the sweat equity partner.  We split all profits 50/50.  We have a 10 unit building that I found and got a great deal on. I hired the management company and kinda run the books to make sure everything is taken care of.   He paid cash for the deal and it generates about $14,000 a month.    Basically how we originally had it planned out was if we go to sell the property, he gets paid back his original investment and then all the profits are split 50/50.   But what happens with all this cashflow in the meantime?  Is it ridiculous to think we could just split this 50/50 in the interim?  How have others structured such deals?   Again definitely should have been discussed earlier specifically but deal happened fast.

Melanie P. · Answer

I suggest having a conversation with your partner about how he would like to handle it and going into that conversation with zero expectations. Finding a property and hiring a property manager is not exactly profuse sweating. I suggest you keep the guy who put $1.8 million into your idea happy and comfortable. You'll probably want to have some level of reserves so that you don't wind up in a crunch for a major expense where more money needs to be added and you don't have it to add..

Account Closed · Answer

If I'm understanding this correctly, your partner paid cash for a 10 Unit in Scottsdale. Which ain't cheap. A 10 Unit in Scottsdale
that generates $14,000 a month, $1400 a Unit, is not a good deal. Rents are well above $2,000 a month per Unit, not $1,400 a month. Could you explain this a little more clearly so we can see if it's even profitable? There may not be any money to pay anyone yet.

Brian Destefano · Answer

Thanks Evan I really appreciate your input here.

Evan Polaski · Answer

@Brian Destefano, unfortunately, there is no right or wrong way to do it.  You could agree to say, while he is technically equity, he gets 6% interest on his money (either amortizing or interest only) and the rest is considered cash flow that gets split.

Or since he is pref equity, he keeps it all until he is paid back 1.8mm, then rest is split every month and even the proceeds from sale are split.

There could kind of be a case to be made, that as the sweat equity, the cash flow is all yours and he only shares in profit at sale.

Ultimately, it comes down to what is agreeable between you and your partner.  If I were the equity partner on a cashflowing deal, I would want a return on my money like my first option listed.

Brian Destefano · Answer

Hey Mike,  sorry it's not in Scottsdale.  I'm new to the site and don't know how that got clicked.

The property is in MA.  Sale price was $1.8M

Gross Rents- $220,000 annually

Mgmt Fee 6%=

Taxes and insurance= $32,000

Other - Expenses- Maintenence upkeep= $20,000

Not accounting for minimal vacancy.

Question is more so the structuring of partnerships and best way to do it when one partner is financing it and other partner is doing all the work 50/50 profit partnership is what we agreed upon.  Let me know if that clears anything up.  Appreciate it!

Partner Financed our multi when can I take cashflow?

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