Interesting Partnership scenario/creative financing

[Tanner Marsey]

Good afternoon. I had a question about partnerships/creative financing (sort of, maybe...?)

I am looking to expand my portfolio here in the next few years. I Have a W-2 job that I absolutely love and have no desire to leave for about 20 more years, which will put me at age 51. I make a comfortable living and easily support myself and young family and am able to save some money to invest on a regular basis. Which leads me to my question....

I don’t care about seeing a return on my investments until I retire. I will take a pension upon retiring but it will be significantly less than what I currently bring home. I am looking to supplement my early retirement with real estate. I am trying to come up with a scenario/structure that would be beneficial for me in the long run, as far as not taking profits in the immediate future, and beneficial for a partner in the short(er) term.

Will it get too messy as far as exit strategies? Ex. They want to sell I want to hold. They want to leverage, I don’t....

Hopefully I phrased this question in an understandable manner. Any examples, suggestions, help or criticisms are welcomed with open arms. Thanks in advance!

[Bill B.]

@Tanner Marsey

If you’re trying not to make money today it might be a little harder. But if mean you don’t care for cash flow when you say you don’t need returns today. I would say buy some buy and hold properties with 15-20 year mortgages. You being in San Diego and me being in Vegas, I would of course say buy them in Vegas. You can certainly disagree about that but I would say outside of California for sure. 

With 20% down and short term mortgages you should be able to get great financing. They may or may not return positive or negative $200/mo each which I take it you don’t care about. But when they are paid off they should provide an easy $1200/mo or more each when you want the money. 

This also gives you a couple exit strategies. One for you to move out of California to lower your income and capital gains taxes, exchange them in to something else, or sell one or two if you need a lump sum. You need less tha 5% annual appreciation to double the value in your time line. You could also just take out a new loan for 1/2 the value then and pocket 4x your original investment while they continue to cash flow. 

You’ve got what they like to call a good problem to have.

[Joe Villeneuve]

Based on what you said, I would say REI isn't for you. If are only interested in returns upon retirement, then the stock market is probably best for you.

[Tanner Marsey]

Originally posted by @Joe Villeneuve:

Based on what you said, I would say REI isn't for you. If are only interested in returns upon retirement, then the stock market is probably best for you.

Thanks for the reply! I do invest in the stock market, too. But real estate is way more appealing to me for many reasons. It’s not that I’m looking for bad investments or anything. I’m just wondering if I could use my ability to not take immediate returns to partner up with individuals and maybe get into some deals that maybe someone looking to take x % right off the bat may not be able to. 

I guess what I am asking is if having a partner not looking for immediate return is beneficial in a partnership. And if so, what are some ways to structure that deal. Ex... fund 30% of the deal, take no profit for x amount of years and maybe take 50% of profit when the time comes 20ish years down the road....

Sorry. I feel like this is a very confusing question that I am not wording very well....

[Tanner Marsey]

Originally posted by @Bill B.:

@Tanner Marsey

If you’re trying not to make money today it might be a little harder. But if mean you don’t care for cash flow when you say you don’t need returns today. I would say buy some buy and hold properties with 15-20 year mortgages. You being in San Diego and me being in Vegas, I would of course say buy them in Vegas. You can certainly disagree about that but I would say outside of California for sure. 

With 20% down and short term mortgages you should be able to get great financing. They may or may not return positive or negative $200/mo each which I take it you don’t care about. But when they are paid off they should provide an easy $1200/mo or more each when you want the money. 

This also gives you a couple exit strategies. One for you to move out of California to lower your income and capital gains taxes, exchange them in to something else, or sell one or two if you need a lump sum. You need less tha 5% annual appreciation to double the value in your time line. You could also just take out a new loan for 1/2 the value then and pocket 4x your original investment while they continue to cash flow. 

You’ve got what they like to call a good problem to have.

This is essentially what I am doing right now. While I have considered the Vegas market for multiple reasons, I am focusing on Southern California for the foreseeable future. I was just wondering if I could use the fact that I don’t need immediate returns to benefit a partner and if it were beneficial, how a deal like that may be structured. I appreciate you taking the time to reply!  

[Joe Villeneuve]

What you're asking for in a partnership is almost impossible to measure.  What would you base your returns (when taken) on?  Profit from sale, cash flow from the time of entrance to retirement, equity build up?...and when would the start of the spreads for any of these (and more) potential returns be measured from and to?

What happens if/when the predicted returns are different when they happen?  What if the returns are better now, or when you retire and you get the majority of it?

These are just some of the issues that are uncontrollable when if you are attemptingto structure a partnership like this.

[Tanner Marsey]

@Joe Villeneuve

That is kind of what I figured when I thought about it myself. But just thought I’d toss it up here to see if anyone has done anything similar. Thanks again for the response. Seems like it has the ability to get pretty messy real quick.

[Joe Villeneuve]

There are 3 reasons, and only 3 reasons to form a partnership.  First, these are NOT one of those three:

1 - Relative or friend wants to be a REI, so you do it together
2 - Your future partner does the same thing as you, so you can relate to eachother.

There are more, but here's the 3 reasons to form a partnership:

1 - Your partner does something important that you can't do.

2 - Your partner does something well that you don't want to do.

3 - Your partner does something you shouldn't do.

[Matt Ward]

Originally posted by @Tanner Marsey:

Good afternoon. I had a question about partnerships/creative financing (sort of, maybe...?)

I am looking to expand my portfolio here in the next few years. I Have a W-2 job that I absolutely love and have no desire to leave for about 20 more years, which will put me at age 51. I make a comfortable living and easily support myself and young family and am able to save some money to invest on a regular basis. Which leads me to my question....

I don’t care about seeing a return on my investments until I retire. I will take a pension upon retiring but it will be significantly less than what I currently bring home. I am looking to supplement my early retirement with real estate. I am trying to come up with a scenario/structure that would be beneficial for me in the long run, as far as not taking profits in the immediate future, and beneficial for a partner in the short(er) term.

Will it get too messy as far as exit strategies? Ex. They want to sell I want to hold. They want to leverage, I don’t....

Hopefully I phrased this question in an understandable manner. Any examples, suggestions, help or criticisms are welcomed with open arms. Thanks in advance!

 Why look for a partnership when you could invest capital into one of many reputable syndicators?  You could choose conservative investments (low cash flow, high appreciation) that are extremely likely to 1031x.  Over 20 years you'd likely roll your money up into 3+ exchanges, deferring all tax and making that money work for you.  When you retire, that initial capital investment is worth significantly more and produces scaled cash flow while still being in a conservative asset class and/or market.  You then have more equity to 1031 out into an even higher cash flowing (higher risk) asset class if you choose or need more income.

This assumes you are OK being hands off, which many people are not. Some people would rather own a SFH that produces a lower return because they feel like more of an "owner" vs investor. To each their own.

[Steve Vaughan]

I was with ya until partner. Talk about a curve ball. What for?  Yes, they can be all kinds of messy.

I'd just read The Millionaire Real Estate Investor.  Buy another house every year or 2.  SD prices will ensure you don't make money in the meantime.  At retirement, you should be golden. 10+ SD houses?  Yep, golden. Good luck!

[Dave Foster]

@Steve Vaughan took the words right out of my mouth.  You're philosophically polar opposite with almost any partner you'll ever run across and you don't need them.  If you don't want to make money now but want it at retirement then SOCAL is your playground.  As you get a down payment put together buy a house.  The goal is to break even at worst and let appreciation over the decades do its thing.  By the way, there's a crazy intriguing graphic out there that compares returns over the last 35 years between the equities market, real estate investments leveraged over 50% and real estate investments leveraged 50% or less.  The group leveraged less than 50% out performed the other two by almost 10% annually when averaged over the last 35 years.  It makes a logical sense. 

Volatility is way too great in other places where people are chasing returns.  Stay home enjoy your job and let the golden egg incubate.

[Alina Trigub]

@Tanner Marsey

I think in your case, syndications is a way to go. It will allow you to be completely passive and you can continue reinvesting the income you receive from it further until you need.  You still need to learn what is it about, how they operate, and  then chose the operators, and the deals. Once you start investing there is no more work on your part. 

Here're a few articles for you to check out:

https://www.biggerpockets.com/member-blogs/10850/7...

https://www.biggerpockets.com/member-blogs/10850/7...

Buying a house will require some work = time on your part.  

Reach out if you have further questions.

[Tanner Marsey]

Thank you all for the responses. Buying a piece of property every 2-3 years for the next 10 years or so is a piece of my plan. The majority of it, actually. I invest in stock and make contributions to my 457 account as well. Just trying to mitigate risk and increase chances of profit in the future and while stumbling across real estate I realized it’s something that greatly interest me and I enjoy studying, researching and participating in it.

Syndication suggestions.... it sounds appealing. Part of me really enjoys the idea of being 100% hands off. The only hold up I have is that when all said and don’t I don’t actually own anything. I like the idea of getting homes paid off, enjoying the benefits during retirement and then passing them along to my kids when I’m dead and gone or using it to fund their education, help them purchase their first home, etc.... not totally agains it though. Will definitely have to research further.

Thanks again!

[Oleg Shalumov]

@Tanner Marsey in syndication you have partial ownership, very similar with owning a stock (you own part of company only). 

I am not familiar with work you do, but I would recommend looking if you are qualified to invest into Solo 401K. You could invest $55K yearly and reduce your current income. You can then use that Solo 401K to invest into Stocks/RealEstate/etc. 

please consult your accountant on the benefit of this. 

[Tanner Marsey]

@Oleg Shalumov

Thanks for the reply. I understand that you own a portion of the property but are pretty much at mercy of whatever the syndicator wants to do or be bought out I would assume?

And that’s a really good idea in regards to solo 401k. I actually need to decrease my income for tax purposes.

Thanks again!

[Ben Leybovich]

So, if you reached out to me with such a proposition, I'd probably explore something along the lines if setting up a blind fund whereby your returns would stay in the fund and be reinvested and compounded until such time that you wanted to start taking distributions.

Note - you would have tax liabilities in the meantime, so you'd likely want to take enough distribution to cover those. Also, since your request is highly out of the box you would likely need to be the sole investor in such a fund, which means you'd need a few million to make it worthwhile for me. To do it right, there would be rather high compliance overhead, which necessitates a certain magnitude to absorb.

I think it's not a bad idea, bit not practical if you have a few hundred thousand. 

Hope this helps :)

[Justin R.]

Originally posted by @Tanner Marsey:

Good afternoon. I had a question about partnerships/creative financing (sort of, maybe...?)

I am looking to expand my portfolio here in the next few years. I Have a W-2 job that I absolutely love and have no desire to leave for about 20 more years, which will put me at age 51. I make a comfortable living and easily support myself and young family and am able to save some money to invest on a regular basis. Which leads me to my question....

I don’t care about seeing a return on my investments until I retire. I will take a pension upon retiring but it will be significantly less than what I currently bring home. I am looking to supplement my early retirement with real estate. I am trying to come up with a scenario/structure that would be beneficial for me in the long run, as far as not taking profits in the immediate future, and beneficial for a partner in the short(er) term.

Will it get too messy as far as exit strategies? Ex. They want to sell I want to hold. They want to leverage, I don’t....

Hopefully I phrased this question in an understandable manner. Any examples, suggestions, help or criticisms are welcomed with open arms. Thanks in advance!

I have a partner in one long term hold property (local to you, as it so happens) who was kinda in the same boat. We structured it such that they have outsized participation in the promote *instead of* participating in free cash flow. They aren't common equity owners - their IRR is capped - which means it's relatively simple to handle a chunk of the what-ifs that come up. When the property is sold, they'll get paid whatever amount of $$ gets them to their IRR. That's the beauty of that measure - whether they get paid every year, on in a single distribution at the end, the value of the investment is (theoretically) the same because the IRR is the same.

This is with someone who is well known to me, though, with a small number of people involved ... I wouldn't venture to do something like that with someone I don't know well.  It's more appropriate for 1:1 or friends-and-family deals, me thinks.

[Justin Windham]

@Tanner Marsey

The Solo 401k can be a great way to decrease income taxes. There is a lot of information on Bigger Pockets addressing the topic if you'd like to learn more. I'd recommend contacting a few of the providers who post regularly here to see how a plan might work for you specifically.