How to Partner With Other Investors on Buy/Hold Rental Properties

Question

Hello everyone,

I'm in a pretty unique situation... I have many friends & family with a lot of cash sitting around.  They want to invest in RE but they're either too busy or basically don't have the guts to invest themselves.  I wonder what is the best way for me to partner with them to invest in rental properties (for long term hold)?  I currently own rental properties myself, and have never involve any 'outside' investors.

So, I wonder how I could take advantage of the situation and make it work for everyone?  I basically would do all the due diligence in locating the property, manage all the rehab, deal with contractors & property managers, etc.  All my friends would do is provide the capital for down pmt, rehab & other costs.  I wonder how other people structure this type of deal.  My questions are:

1) Who holds the title?

2) Whose name(s) is on the loan if the property is mortgaged

3) What percentage of ownership is fair for me (ex:  20% of ownership share + 20% of rental income)?

4) Should I put any $ of my own into the deal, or just straight sweat equity

5) Do we need to set up an LLC to do this?

I would appreciate any advice on how to structure this type of deal.

Kevin

Arlan Potter · Answer

You own the properties 100%

You borrow from them 80% of an appraised value. A personal loan

You give them a first mortgage on the property

You make monthly interest payments to them

Balloon principal in 3-5 years(or roll over to another term)

Simple deal

No partnerships, no investors, just people loaning you the money.

And you better pay back your family and friends or you wont have any family or friends.

Joe Villeneuve · Answer

@Kevin Starr

The LLC can't get the loan, unless it was a business loan, so an individual would be the holder of the note.  The % splits would depend on how many and what their involvement would be...and sweat equity (we call it the "heavy lifting") should not be undervalued.  There is no deal without any of the participants.  The fact is, you have the deal, and could find another finance solution easier than they could find someone with a deal.

How much you put into the deal has little bearing if you are the one organizing it.  It's your deal.  You dictate the terms.  Having said that, if your potential funding source doesn't agree to it, you actually have no deal.  Start by asking them what type of return they would wanton their investment, does it need to be all in cash, and over what time period.  Most important, find out how much cash they are bringing to the table.

Joe VilleneuveREcapSystemA2REIC

Kevin Starr · Answer

@Joe Villeneuve - To answer your question.. yes, all the partners, including myself + wife have very good credit and could qualify for a loan.

I like the idea of setting up the LLC w/ partners involved.  But I suppose that means you have to qualify for the loan as an LLC?  Also, if I want to put $0 capital into the deal, what do you think my % ownership should be based on putting in sweat equity alone?  Is 20% reasonable?

Joe Villeneuve · Answer

@Arlin Potter  It's not that complicated, but I do agree that having them loan it is one of the ways we would approach a situation like this.  We do partnerships, or we set it up using financing, either way works, but not for every scenario...thus my original question to @Kevin Starr

Arlan Potter · Answer

I wouldn't.   If they are just provided money then they need to just loan, not own.

You could have a attorney set up a Real Estate investment LLC (expensive with multiple owners)(also expensive accounting wise) With a long operating agreement about what to do and what not to do and when to do. It will get ugly.

Someone will get their feelings hurt, it will end bad.

It would be better if is was with strangers, then you/they could get mad or sue.

And are they going to pay you for your time? You are the one finding the deals and getting them ready and actually making the money.

If they want to own real estate, let them get hooked on this website and own their own.

Maybe others on this site have a way to make it work, but all I see is difficulty.

Joe Villeneuve · Answer

@Kevin Starr We do this all the time.  First, do you or your family members have good enough credit to get a loan on the property you would buy?  The answer to that question dictates my next question and answer.

Initially, just set up an LLC with all involved as members.  Base the % splits to each partner/member on whatever they will all agree to.  Now the caveat to that is you must start with a % for yourself that will satisfy your needs, but the answer to my initial question actually will help answer how you split the shares.

We do this all the time, like I said.  They have the cash, but not the knowledge and/or time to find, analyze, setup and manage the deal(s), so don't sell yourself short...but don't get greedy either.  If you have cash, and credit ability on your "team", you have a lot more power to do more than one deal.

Joe VilleneuveREcapSystemA2REIC

Kevin Starr · Answer

Arlan.. thanks for the comment.  My friends & family would actually like to have ownership in the properties too.  They're not interested in just lending me the money.  They've read about all the benefits to owning real estate long-term, and they want in.  But they just don't have the knowledge, time, nor the courage to jump into a deal themselves.  They basically want me to be the lead investor, and they just provide the capital as passive investor/owners.  How should I structure such a deal?

How to Partner With Other Investors on Buy/Hold Rental Properties

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