Handling Unexpected Costs in a Partnership

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Handling Unexpected Costs in a Partnership

Dan Buchta
Fort Worth, TX · Member since 2017 · 25 posts · 12 votes

Hi All,

I'm pretty new to REI but I was wondering how most people who have done partnerships would handle a large unexpected cost in a rental property. Here is the example that I'm thinking about:

I get that partnerships can be formed any way that we agree upon so I guess my real question is, how would someone protect themselves from this sort of situationn? My initial thought would be to have some sort of clause in the partnership that says we split all required operating repairs over $1k but I would love to hear other people's thoughts.

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Kim Meredith HamptonBusiness Member
Real Estate Broker · St Petersburg · Member since 2014 · 2k+ posts · 2k+ votes
6y

@Dan Buchta depends on how you lay out the operating agreement, all and I mean ALL things need to be laid out from the beginning so that there is no chance that you ruin family or partnership relationships. Good to have an experienced real estate attorney prepare your operating agreement, they will guide you through all the good, bad and ugly that can arise during the operating of the property. 

Because you both are 50/50 and they put up money and you are performing good will by managing, you both should split the expense.

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  • Kim Meredith HamptonBusiness Member
    Real Estate Broker · St Petersburg · Member since 2014 · 2k+ posts · 2k+ votes
    6y

    @Dan Buchta depends on how you lay out the operating agreement, all and I mean ALL things need to be laid out from the beginning so that there is no chance that you ruin family or partnership relationships. Good to have an experienced real estate attorney prepare your operating agreement, they will guide you through all the good, bad and ugly that can arise during the operating of the property. 

    Because you both are 50/50 and they put up money and you are performing good will by managing, you both should split the expense.

    [email protected]407-448-6679Podcast Guest on Show The Key to Scoring Discounted Deals in One of America’s Hottest Markets
    Compass | St. Pete514 Reviews
    WebsiteView Page
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  • Anthony Simboli
    Investor · Londonderry, NH · Member since 2015 · 163 posts · 59 votes
    6y

    Always have a lawyer, and make sure your agreements (50/50 split) is written clearly.

    No matter how good your relationship/partnership is always get everything in writing. Even if you've already started, it's never too late.

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  • Jim K.
    Rental Property Investor · Charlotte, NC · Member since 2017 · 271 posts · 259 votes
    6y

    You definitely want to iron out all of the details and get an attorney involved. 

    Having said that, I haven't seen a partnership where you're splitting the profits but maintenance or capital expenses are the burden of a single member. You typically treat those expenses and expenses for the LLC.

    You need a provision in your Operating Agreement for capital contributions and capital calls and how you want to structure them. The traditional way for capital calls is that the members contribute the amount needed based on their equity in the LLC. You will also want a clause for if a member is unable to meet the contribution. 

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  • Matt M.
    Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
    6y

    @Dan Buchta

    Personally I’d never partner, but I’d say before you guys start sending out cash flow checks, there needs to be a reserve fund for that $8000 repair..

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  • Dan Buchta
    OP
    Fort Worth, TX · Member since 2017 · 25 posts · 12 votes
    6y

    Thank you everyone for the input! This has been very useful. I will definitely consult a lawyer before any agreement is made but I wanted to go into the situation as informed as possible.

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  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    6y

    @Dan Buchta and just to be clear,  I would not only budget for the downpayment, but go in with a reserve account funded.  Outline what the minimum balance that reserve account should be maintained, and then you can fund this scenario from reserves and not "out of anyone's pocket".  Ideally, it will not only be funded to a minimum level initially, but each month, there will be additional capital allocated in the budget to continue growing that balance, so if this large expense happens, and another right behind it, you are still not out of cash.

    Clearly, the funding initially and allocations each month are "out of pocket" to you and/or your partner, but it is a lot less painful to draw and rebuild a reserve than it is to write a check, in my opinion.

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  • Ryan Seib
    Attorney and Real Estate Broker · Madison, WI · Member since 2016 · 265 posts · 100 votes
    6y

    net income should be defined in the partnership agreement so that you do not have to eat any costs. Net should mean everything is shared. Reserve account should be in place and capital distributions on a schedule. 

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