How to partner with friends and family?

Question

We hosted thanksgiving this year, and my family spent last week with us. They come from various states, mostly the west coast.

Of course during part of our catching up, I had an opportunity to share some of the [BRRR] RE deals in the local market. With most of my deals, I was able to complete the house within 75-81% ARV, and positive cash flow.

They are all interested and would love to also invest in rentals here locally, and of course I’d love to help them. They are all busy professionals who don’t have the time to source deals, manage rehab, process the refi, etc. But of course they see the value in investing in RE long term.

They’ve asked if I could help with getting them deals, and pretty much managing the whole process until it is rented out or given to PM. They want to make it worthwhile for me as well, and asked to come up with a creative way where I could also be compensated for making the deals for them.

Any recommended ways to “partner” with others in acquiring buy/hold/brrr single family properties? They will be providing the funds, and we’ll also be using their credit for the mortgage, etc.

Some points to highlight:

- I love making real estate deals and I love my family. Honesty, I would probably enjoy helping them with these deals for them at no “cost” , but it’s rewarding to see they value this and want to make sure I’m equally compensated.

- I am not an agent

- if possible, I’d prefer more of compensation through equity in the deal, rather than a one time “service fee”, or margin through selling “turnkey”

- if equity is not an option, maybe because my partners rather own the home entirely, could i charge a flat rate for my services? If so, what is a reasonable amount?

I’m really grateful for the community at BP and look forward to hearing how you all have partnered with friends/family who were the money providers!!

Thanks in advance.

Justin Phillip · Answer

@Timmy Fritz

Yes, I’d appreciate that. Thanks!

Timmy Fritz · Answer

Hey Justin, I know that the lender I'm working with can do this. I can PM you his info if you'd like

Nicole Heasley Beitenman · Answer

@Justin Phillip The potential partner (PP) would be bringing the capital to the deal. My PM and I would be bringing our experience and do all the legwork/financial analyses as we do have a few small deals under our belt; however, my PM and I are split on how to compensate the PP. We want buy-and-holds and could pay the PP with equity, but as I'm potentially switching to commission income and refinancing will be trickier, it may be easier to start with flips.

As @Nathan G. pointed out, the PP is taking on quite a bit of risk. I think that, for the first deal, we should overpay the PP. He can have 100% for all I care. I want the experience, the established track record, and the repeat business from the PP and others that would come from successfully executing the deal once we proved we can earn the PP a return. My PM thinks that the PP will then expect a huge return from every deal going forward and would rather just earn him 3-ish percent more than the returns he's receiving from his current investments.

Nathan Gesner · Answer

I did listen to that podcast but I skipped the end where they talked about syndication because that's not my bag. I do know he talked about partnerships, which are far simpler.

If you have someone you intend to partner with, have an attorney draw up a contract. Spell out what each person is responsible for and how they will be compensated. Part of your plan may be to sell it after X years. Or you may decide to hold it forever and cash flow. What if Partner A wants to leave? Can he sell his portion to Partner B? Sell it to a friend or family member? What if Partner A passes away?

Lots of things to think about but a small partnership is significantly simpler than syndication.

Justin Phillip · Answer

Good hearing from you, Nicole. Do you have an idea for what you'll charge your family friend for this service? Will you be an equity partner? Or do you anticipate being compensated for the service.

I was hoping to get more feedback from the greater BP community on this :)

Justin Phillip · Answer

Thanks for your input, Nathan. If you heard the last podcast issue, @Brandon Turner briefly talked about syndication for smaller 'residential deals'. Do you have any idea how that would work?

My thoughts are that you and your partner form an entity that acquires the property, and then divides the gains (and losses) as agreed upon. That said, do you know if lenders would be OK lending to the LLC, and will we still be able to use my partner's credit to be the sole borrower with regards to the loan?

Nicole Heasley Beitenman · Answer

@Justin Phillip I am in a similar boat. We have a family friend who wants to learn more about investing. First, we're going to sit down over brunch or dinner or something to learn more about his investing goals--whether he wants to be active or passive, what kind of return he'd expect, and in what kind of time frame he'd expect that return. Then we'll explain our process for finding and analyzing properties. Next, we'll discuss what we look for when analyzing those properties.

Please update us on your progress! This is a new ball game to me as well, so I'll be on the lookout for advice.

Nathan Gesner · Answer

Investing with friends and family is risky. If you do it wrong, it can not only hurt them financially, it can destroy your relationship.

My thought: find a way to help them find deals that enables you to get the ball rolling and then step away. For example, maybe you help them find the deal, renovate it, and then put them in touch with a property manager to handle placing a tenant and on-going management. In exchange, you charge a fee for putting the deal together. You partner, you get paid up front, and then you step away at a point that it's still a successful journey.

How to partner with friends and family?

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