Partnering for "buy and holds"

[Zac P.]

I have had numerous people around me interested in investing, but do not want to do it alone (no experience). While I am no guru by any means, I know a lot more than the average person. I am seeing potential opportunities here to partner with people...

Right now I am all buy and hold. No flips or anything. I would love to try to get a silent, cash partner who basically funds the purchase (just a down payment) and pays closings cost, etc. I would manage the property (I am already a property manager). I would like to split ownership 50/50 and have a plan that in 5 years we would have some kind of exit strategy (sell, keep, etc). We would split costs (repairs) 50/50?

My question is, how have you guys partnered on these kind of deals in the past? We would be doing a SFH up to an 8-plex. My goal is to get into a property for 0 down. Being young, I am ok managing it and doing the "dirty" work. I assume a good option would be to open up a new LLC for our venture. Any helpful info would be much appreciated!

[Frank Gallinelli]

@Zac P. Many of the partnerships I see, where the managing member contributes a minimal amount amount of capital, are structured something like this:

The non-managing members (i.e., the equity investors) receive the bulk of the cash flow year-to-year, perhaps as much as 90-95%. The split is different, however, when you sell the property, where the managing member gets a larger split, perhaps as much as 50% of the cash proceeds.

This sort of arrangement conveys an important message to the equity investors. It tells them that you are confident enough about the overall profitability of the project and about your ability to manage it that you're will to wait until it reaches a successful outcome before getting most of your share (although you'll probably take a management fee in the interim). You have to remember that these folks are putting a chunk of cash in your hands and relinquishing control; they're looking for tangible evidence that you believe you can deliver.

Something else that is very common to encourage investor participation is what's called a preferred return. Basically, that's a promise that the investor will receive X% on his or her investment each year out of the cash flow before any cash flow split with the managing partner kicks in. If there isn't enough cash to cover that preferred return, then the arrearage is carried forward and still owed, even up to the time of sale if necessary.

Finally, one bit of housekeeping since you mention LLCs and a plan to buy several properties: I would urge you to form a separate LLC for each property you purchase. A main reason for using the LLC is to isolate liability. If you purchase several properties under one LLC umbrella and one of those properties turns into a legal nightmare, it could jeopardize the others.