Money Partner: How to structure

[Ben Reiss]

I have one new construction duplex rented out to students which is nicely profitable. I am looking at another one that will be slightly larger and slightly nicer. resulting in a bit higher rent. I don't have enough money for the down payment right now. I should be there in about another 18-24 months.

I have a friend who is interested in earning more on his money than the miniscule returns from the bank. He cannot get a bank loan since he has no real income. Does have a very nice nest egg from a divorce where he was a stay at home dad. How could I structure things so they were fair to him and also allowed us to move forward. I think the bank might question where I got the 100K.

He does not want to be involved. He just wants to lend the money and get his return (while covering his ***). Could we set it up as a partnership with specific buyout time frame. Say set it up so we partner together and he is given a buyout from this cashflow and other units I have.

I could theoretically give him an easy 2.5K a month till paid off, without touching any cashflow from the new unit. Figure borrowing for 3 years amortization on 10% gives a payment of $3,227. If I made it an easier cushion I could make it 5 years which he is ok with for a payment of $2,125. Assume I am not crazy in assuming this debt and is there a way to structure this.
I have good credit and a great DTI once the rental is counted. I also have 2 jobs and make very good cash bar tending in the summers.
Other option was to give him a second on my current duplex. Owe $310K worth about $425K (no room to pull cash.) and on the new one. Do 15 year amort with a 5 year or 7 year balloon.
I am looking for any ideas on how to structure the deal so it's fair to both parties. both parties are covered and everything is spelled out.

Thanks Ben

[Bill Gulley]

Books are written about how to structure partnerships there are more ways to split a business than could be written here, but I can tell John likes his method.

Your friend seems to want to be in a passive investor position, keeping himself as a lender. He can keep his money in what ever investments he may have and simply add to the partnership (LLC) capital account as needed. Talk to your accountant about the capital accounts and a loan from one to another. He should not be dropping cash in an account but certified funds from his depository bank to the new account and you can work immediately from those funds. Each bank has different cut offs besides the regulatory requirements for any large cash transaction report so don't even be concerned as it will match up from one depository to another.

I'd keep him as a lender instead of getting involved in profit sharing and interest earnings, but what ever you need to do to make him happy.

If you do share profits that opens the door to being responsible for the operations and profits and more partnesrhips fail as one partner sees themselves doing most of the work and having to pay for very little contribution by the other. After you use his money and you earn your own, then what? The longer you stay in together the more it will cost you so to speak, so short terms that are renewable might be a good way to think of doing business.