JV Partnership on Buy and Hold Apartments

[Leslie Schwab]

Hello Bigger Pockets!

I have several apartment building investments and am in discussions with a partner who is interested in putting cash into future deals.  He is willing to contribute 100% of the cash for the purchase and any required renovation (with no bank loan).  

I am trying to think creatively about how to structure the net cash flow splits and am liking the idea of a preferred return on his capital contribution and then a percentage split on remaining cash flows and on the net appreciation at sale.  I plan to take a reasonable fee for property management and also a commission when we sell a property.

The most important things to him are a reasonable preferred return and then the appreciation on the asset.  I care the most about the annual cash flow and, secondly, about asset appreciation.  

Can anyone provide advice on how you've structured these cash flow splits in the past?  Is there another creative option that I should think about which maximizes each of our goals?

Thanks very much for your thoughts!

[Chase Louderback]

@Leslie Schwab That is awesome!  It seems like a lot of people are looking for investors like that (myself included).  How did you meet this partner?

As for how you can structure the splits and deal. Here are some things that you can keep in mind: 5-9% pref is common and equity splits ranging from 50/50 to 70/30 (70% being the investor) are common as well.  Fees you could consider for yourself would be a finders/acquisitions fee based on a percentage of the purchase price or a flat rate that is agreed upon, an asset management fee (1.5% to 2% of the gross income) for managing your property manager, a construction fee (if there is a major lift), and it sounds like a you are an agent so you can get commission on your sale.

Those are some general parameters and it is up to you and your partner to decide what you believe is fair and you are both happy with getting.  If you are holding for the very long term then it may make sense to only take an asset management fee, try to get as close to a 50/50 split as possible and offer the investor a preferred return that they would like for their money.  

Keep in mind, if you ever decide to refinance the property and all of the investors money is returned to them, then they no longer get the preferred return and it would become just a straight 50/50 or whatever split.