Partnership Structure for Real Estate

[Tu Cao]

Hi all,

I am an Interventional Cardiologist with a decent salary and a very stable job. I love what I do and do not plan to quit. I have a friend that I want to collaborate with for real estate residential investments. I will be the principal money contributor to the deal. I have little expertise in the housing market, and I prefer just to be passive in the endeavor. My friend has some experience. He owns two properties and is renting them out. He proposed 50/50 deal. We have drafted a preliminary proposal. What do you think?

1. Proposed Ownership type:
   1. Title to the property will be Joint Tenancy between Ben and Jerry. After one month of ownership, the title will be transferred to an LLC. This way it is still possible for us to utilize conventional loan. If we open LLC first, lenders will require us to use commercial loan which carries high interest, short duration, and a balloon payment. Ideally each LLC should hold no more than two properties to better protect ourselves from potential frivolous lawsuits.
   2. Percent ownership will generally be 50% each. However, this is individually decided on each deal/property. If both partners have equal amount of cash up front to pay for the down payment, then this will be a 50%-50% deal. However, if both partners do not have equal amount of cash up front, ownership percentage will be discussed and decided separately before purchasing.
      1. Exception: For the first deal/property. Jerry is proposing the following deal strucBenre:
         1. Percent ownership will be 50%-50%.
         2. Ben will pay the entire down payment up front.
         3. Jerry will obtain a 5-year, 0% interest loan from Ben for 50% of the down payment. For example, if the total down payment that Ben pays is $250,000, Jerry will carry a loan balance of $125,000, due within 5 years at 0% interest. Each year Jerry will pay back into the business account 1/5 of the amount owed ($25,000) so that by the end of fifth year Jerry will owe $0.
            1. When Ben offers Jerry the 5-year 0% interest, he is essentially losing out on a total of $11,136 ($2,227 per year, $186 per month, see breakdown below to see calculations). This amount is based on the fact that Ben can just find a risk free investment that pays him 3.41% (rate is based on latest 5 year treasury bill rate).
            2. Why is this still a good deal for Ben and Jerry? For Ben, the cost of doing business for him is $186 per month. When comparing this to a property management company that charges 6% - 12% on gross rent income, this amount is reasonably small. For example, if gross rent income is $6000 per month, and if property management fee is 10% (10% is typical when you only have a couple properties), Ben would have to pay $600 per month. Comparing that to the $186 per month cost for Jerry to manage the property, Ben saves over 2/3 while feeling rest assured that Jerry takes much better care of the property than a property management company, since it is Jerry’s best interest to do so as he is also an owner.
            3. Here’s the breakdown of the amortizing loan of the 5-year $125,000 loan at the current risk-free interest (3.41%) that Ben can get if he buys treasury bill or loans to someone else:

Any thought?

Ben