Partnership Financing Question

[Jeremy Sanders]

I want to make sure I got the full understanding when it comes to Partnership Financing.  Please if anyone can fill in the gaps. 

1.) Fully Equity Partnership is mainly used when flipping Houses.  You use the funds of others to fund the deal, you do the work with rehabbing, renting, and managing side of the deal and both you and the initial investor whom invested their funds split the profits 50/50.

2.) Down Payment Equity Partnership- The investor funds the down payment needed.  The investor will then get the mortgage in their name, but the legal title will be in both yours and the investors. You both will then split the profits 50/50.

3.) Private Lending Partnership - ( ??)  This one I'm alittle confused on.

4.) Credit Partnership -  A person lends his ability to get a loan but doesn't supply any down payment. You would then use a hard money lender or another private lender to purchase a property, including repair costs. After the home is rehabbed, rented, and producing month-after-month cash flow, the initial lender refinances the home into a fixed-rate, long-term mortgage using his or her great credit, but both remain on the legal title for the property.

[Kevin Yoo]

@Jeremy Sanders

Private money is money from any individual that is not hard money, bank money, institutional money, etc. Partnerships can be created in multitude of ways. Let me see if I can share with you how I have done it. But as to how the equity of the property or the profits of the deal is split up is dependent on who brings what to the table.

1.) Fully Equity Partnership is mainly used when flipping Houses. You use the funds of others to fund the deal, you do the work with rehabbing, renting, and managing side of the deal and both you and the initial investor whom invested their funds split the profits 50/50.

This is one common way it is done for fix and flip. But equity partnership is not only for flipping homes and can be done for buy and hold properties. Moreover, some private lenders may want to be a debt partner and not an equity partner where they are simply lending you the money and you pay a set interest rate just like a bank loan. 

2.) Down Payment Equity Partnership- The investor funds the down payment needed. The investor will then get the mortgage in their name, but the legal title will be in both yours and the investors. You both will then split the profits 50/50.

This is simply Equity Partnership in a buy and hold deal and can be structured this way. However, as to who is on the title, this needs to be negotiated because some investors may not want you on the title if you do not bring any cash or credit to the deal. And who brings the down payment also needs to be worked out. If the Investor puts in the cash for down payment and gets a loan in their name, they have both their cash and their credit at risk. Many investors will do one or the other but not both. And for the split of the deal you will need to split the equity, cashflow, and the tax benefits. Again, if the investor is bringing both cash and credit, they may want more that 50%. It all needs to be negotiated.

3.) Private Lending Partnership - ( ??) This one I'm alittle confused on.

#1 can be Private Lending Partnerships if the Investor simply wants to loan you the money to do the flip and do not want to be on title. #2 cannot be Private Lending Partnership since the Investor needs to qualify for a loan.

4.) Credit Partnership - A person lends his ability to get a loan but doesn't supply any down payment. You would then use a hard money lender or another private lender to purchase a property, including repair costs. After the home is rehabbed, rented, and producing month-after-month cash flow, the initial lender refinances the home into a fixed-rate, long-term mortgage using his or her great credit, but both remain on the legal title for the property.

Yes, if an Investor only brings credit to the deal then he is a credit partner. You should use a credit partner because they have excellent credit that allows you to get a very good loan. So, you would most likely not refinance the loan after the property is stabilized. And if the credit partner does not bring down payment and you get another investor for this, then you need to give them a piece of the pie. As to who is on the title, if you have three separate parties, this gets tricky and needs to be negotiated. The credit partner must be on title when they qualify for the loan because the institutional lender will require this. But once the loan is in place you can decide who is and who is not on title including the credit partner. 

You are making this more complicated by trying to fit each square idea into a round hole.

Real Estate comes in two flavors. Short term and long term. That is fix and flip or buy and hold.

In fix and flips, private money can be debt partner or equity partner. Debt partner simply lends you the money for a fixed rate of return and is not on title. Equity partner gives you the money for a portion of the profit and is usually on title.

In buy and holds, there are three people to each deal if you include financing. One is the person who finds, fixes, rents, and manages the property = Ground Partner. Two is the person who brings the cash to buy and fix the property = Cash Partner. Three is the person who brings the credit if you want to finance and leverage the deal. You can be one, two or all three persons in this deal. If you have different individuals then you need to make sure that there is an equitable way to share the three benefits of owning real estate: 1) equity, 2) cashflow, 3) tax write offs. 

I hope this helps.