Multiple small-time partners?

Question

New investor here, and I'm trying to learn about all my financing options while I'm searching for a buy-and-hold investment. I have a handful of friends/co-workers who would love to invest with me, but each of them only has $5,000-$10,000 to work with. Is it worth our time/effort to include them in potential deals? I want to say "yes," but how to go about doing so?

My goals are monthly cash flow, and I've been looking at properties (mostly duplexes) in the $70,000-$120,000 range. Could I pull two friends together and with me split the down payment three ways offering them a return on their money or ownership in the property?

What would you do?

Linda Weygant · Answer

Yes, you can do this and you can offer them any combination of return or ownership. Make sure you talk about how you'll manage everything including who is responsible for collecting rent, paying bills, hiring contractors and repair people, etc. Put it in writing, preferably with a lawyer. Have everybody sign it, notarize it and keep a copy. At the end of the year, you may want to have a CPA look everything over and certify that everything has been correctly accounted for. This will help minority partners have some piece of mind about their investment.

That said, be VERY careful about going into business with friends, family - well, anybody - but particularly friends and family. If you don't all have the same end goal (and it's unlikely you will), it can make things very difficult and ruin otherwise great relationships.

That said, be VERY careful about going into business with friends, family - well, anybody - but particularly friends and family.  If you don't all have the same end goal (and it's unlikely you will), it can make things very difficult and ruin otherwise great relationships.

Neil Aggarwal · Answer

I would form an entity where everyone get a share based on the size of their investment. And yes, make sure you do it through a lawyer.

Tarl Yarber · Answer

Hi Ryan,

Congrats of trying to get creative and find ways to make a deal happen!  Keep in mind i am not from your area, but i have a good amount of experience with partnership deals.  First: be very very clear with what your goals are with this property.  If its a duplex, are you living on one side and renting the other? Are you fixing any part of it up prior to renting? What kind of financing are you getting? What are the rental rates, insurance costs, maintenance, have you budgeted for not being able to rent right away, taxes (property and gains), etc. Second: Since this is your first rental and the first of your friends, is everyone very very clear on what their money is being used for and the risks involved? I never partner with anyone unless they have their eyes wide open and there are clearly defined terms in a contract.  If you want to use their money and give them a portion of the return with no owner ship in the property, that is fine, but if you want to give them part ownership then it is best they understand they get part of the losses as well if they happen.  Third: how are you taking title? It is pretty simple to give ownership interest in a rental by giving shares of an LLC to other investors, depending on your state will depend on how easy this is to set up.  In my state of WA its $200 to set up an LLC and you dont have to file your operating agreement at all.  You can create an LLC, give a third to each of you and two friends, and then lay out the way the capital investments will work, operating expenses, profit distribution, etc.  There are a lot of other ways to do this depending on how formal you want to be. Also consider what will happen if one of your friends all of a sudden demands their investment money back for some reason...how will this be handled? My advice is to keep things VERY clear and defined, if this is done incorrectly and things go wrong, you will have some pissed off friends looking to you for blame...

Hope some part of this helps.

Skylar Dejesus · Answer

Interested in hearing the responses from BP members something I have also wandered.

Austin Mudd · Answer

@Anthony Angotti

Tarl Yarber · Answer

@Ryan Moran

PM me when you get to the point you need more help

Amy Shepherd · Answer

One other thing to consider...the new entity can have a significant expense at tax time to get the tax return prepared, definitely more expensive than a simple 1040. Make sure you get an estimate on that and plug it into your expenses. It can take a bite out of profits if there are multiple partners on low priced properties.

Ryan Moran · Answer

@Tarl Yarber awesome post, sir. I appreciate the specific, actionable advice.  In the next few weeks when I'm able to put this together I'd love to pick your brain about the intricacies of partnerships.  The more educated I can sound when I get lawyers involved the better.  Thanks!

Ryan Moran · Answer

@Linda Weygant Thanks for the reply.  Sounds like I would just need to get the people and money together then go straight to a lawyer and not try to work outside my area of expertise.  I'm cool letting the lawyers do what they're good at it.  And I completely understand what you're talking about with conflicting goals.  I'll make sure we're all on the same page and like you said, make sure it's in writing.

Ryan Moran · Answer

Thanks for the replies everyone!  This is just another piece of the giant puzzle I'm trying to put together.@Neil Aggarwal that was my first thought.  But again, I've never started an entity so I wasn't sure that would even make sense to do.  Thanks!  I'll definitely look more into that process.

Multiple small-time partners?

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