How to structure a deal with partner who will do the work?

Question

I'm going to be buying a rental but am not in the area nor do I know much about buying/fixing/selling houses. I have the money and will be keeping the property in my name.

My sister is the one who will, in all likelihood, help me with the selection of the property, fixing it up and being the property manager.

I see that it's standard for PMs to get first month's rent plus 8 to 10% monthly. But what about this leg work that she'll be doing? I've found a few properties online that look good; she looked over them herself and told me what might need repaired before renting out. Does an hourly rate make sense in this case; paying for her time in visiting sites and viewing listings? Or is this something my agent should be helping me with?

Some of the repairs she'll be able to do herself, other things she may contract out. She works full-time and is a recent single mom, so her free time is going to be a bit limited to when her child is at the dad's. She's already bought/fixed up three homes and loves doing this kind of stuff.

Since it's my sister, and I want to keep our relationship strong, I want to be super clear about everything and be fair to her.

I'd love to know what others think of this idea and how to structure our agreement.

Charlotte Edwards · Answer

Thanks for the advice. This isn't a charity case; she's got a job, she loves doing this (as I mentioned she's fixed up three houses successfully), she's good at doing most of the work herself and hires out what she cannot. My husband and I will own the house; I would never loan money to family, so being a lender is out of the question.

I didn't know it could be illegal for her to manage this. I'll add that to my list of things to learn more about.

Boris Grinberg · Answer

@Charlotte Edwards if you are looking for investment opportunities and have someone like your sister invest for you and you trust her, it is not a bad way to go about it. You may not make the best returns, but you help your sister, you get what you want and you sleep well at night.

In terms of a proper split, we see JV proposals/offers from investors who are looking for our funding and, in return, they offer us 50% of equity. If your sister is planning to work on this project part time, you may be able to get a slightly better deal.

But I am not sure you want to be a hard money lender for your sister. I am a hard money lender but would not walk down that path with my siblings.

Christian Jones · Answer

@Charlotte Edwards   Charlotte... it doesn't sound like you're able to contribute much to the deal except cash, which makes you basically the lender.  If you trust her to select the property, manage the repairs, and sell for a profit, then you should remain a passive investor. Lend her the money on your terms. Charge her hard money points during the hold time, you keep preferred equity (your money comes out first), and you take a pre-determined portion of the overall profit (say 10-20%).

Bryan O. · Answer

@Charlotte Edwards is she an agent? It doesn't sound like it. In most states it is not legal to manage another person's property unless you are an agent. She's also a single mother with a full time job, so how much time does she have to fix it up? I think it's great that you are trying to help her, but from the business side you may end up paying for a charity rather than an investment.

I would get quotes from contractors on the different jobs that need to be done and then pay her that amount. If she does the work then she keeps the extra money that would have paid for contract labor. If not, she hires the contractor and manages the job. Maybe give her 5% of the job cost for overseeing it.

Charlotte Edwards · Answer

Thanks for your input; I agree that professionally she's none of those (she's a full-time HR manager) but has bought and renovated three properties.  Most recently a $20,000 place that was renting for $500/month but comparable to the ones going for $900/month. Since she's newly single, and working to build up a stronger financial foundation, she's living there for awhile til she's ready for another project. That's where helping me comes in; she loves finding houses and fixing them. She's got many friends/connections who she's received help from with her past homes and would hire for the work she can't/doesn't want to do.

It has nothing to do with her needing money; I'm confident in her decisions and trust her. I just don't know how to set up how to pay her fairly for her work. Per hour? For each project?

Russ Draper · Answer

You could consider that she is providing 3 roles.  One is a PM, another is a sort of general contractor, and lastly as a RE agent.

She isn't a RE agent, you should find one that knows how to work with investors.

She isn't really a GC, she will cost you more with mistakes.

If she is a PM then the scenario above makes sense.

In all honesty, I would keep family out of it if they have no experience.  If you want to just give her a loan until she finds a job that would be better in my opinion.  Sorry to be the bearer of bad news.