Financial Partner Deal Structure?

Question

How would you structure a deal with a passive financial partner?

I have someone interested in my passion for real estate education.  Although I’ve only completed one deal and have just one SFH at the moment, they would like to partner up for the next deal and have a combination of cash and stocks of about $150,000 that they are open to investing (Although, they will likely want to start with about $30,000).  This person is about 10 years from retirement and likes the idea of having passive income during retirement.  My wife and I currently have a remaining $20,000 HELOC available plus about $10,000 cash that we were going to use for our next down payment.

Would you recommend going in half/half with the partner on down payment and charge a property management fee for managing and split the equity?

Would you let the partner put down the majority of the down payment?  If so, would you still split equity if you are doing all the work?

This is an interesting opportunity for us to grow a little faster that we previously thought, but I would love some ideas and advice on how to proceed.  We are leaning towards small multi-family.  What would you do?

Jay Hinrichs · Answer

personally I only think this works with scale  ie 25 to 50 units.. not one.. he would be better off just investing in a REIT or syndication or something like that.. these are do it yourself type deals that from my vantage point make zero sense for them and you..  now flipping can be something to share. where you do a flip make 30 to 50k and then split rinse repeat.

Clint G. · Answer

I'm in the process of my first flip where I'm the money guy and my partner is running the project (sounds like you in this situation). I fronted all of the money for down payment and ongoing expenses, and we split the profit/loss at the end of the flip.

We both have LLC's and our LLC's created a Joint Venture for this flip only. All of the terms were spelled out in the JV.

On another note, do you trust yourself with someone elses money having done only one deal in the past? I'd make sure your really ready to take on that responsibility (and you might be, I don't know).

Daniel Dietz · Answer

@Andrew Perkins that is correct, our share of the split replaces a 'property management fee'. The better we manage, the more we both make. That is our incentive to go above and beyond what a typical PM would do - 50% of every dollar saved or made in cash flow goes into our pocket :-)

We also set these up as LLCs, and if we decided we no longer wanted to or were able to (say do to injury of death etc...) the PM fee would be deducted from our half of the returns, since that was 'our contribution' to start with.

Jay Hinrichs · Answer

its what ever you guys negotiate.. although form the investor side the returns are probably very small given you have to split cash flow with max debt..   who gets the debt ?  YOU  ?

Andrew Perkins · Answer

@Daniel Dietz

Awesome!  That’s exactly what I was wondering. So with you not contributing any of the down payment, do you forgo a management fee because you are splitting equity growth and cash flow for no money down?

Andrew Perkins · Answer

@Ola Dantis

I agree, we are hesitant to start flipping and feel more comfortable with buy and hold at the moment.  At least until we’ve had some more experience in minor renovations.

So you are saying that we should come to an agreement with the partner on a set return and then work the deal using that number to figure out our own cash flow and management fee?  And in that example, are you basing that off each party contributing $30k?

What would you recommend if the partner were contributing the full down payment instead of half?  We would be using a HELOC for our portion, so some of our cash flow will be eaten up by that payment.  Could we still make it worthwhile for the investor if they put up the full deposit?

Ola Dantis · Answer

@Andrew Perkins First and foremost, I would advise you guys to be cautious if you ever decide to use the capital for flipping a house because there too many inherent risks, especially at this stage in your REI journey.

So, let's say small multifamily could work to start with. With $60,000 seed capital [20% down], you are able to take down something around the $300,000 mark (minus closing costs and all).

Amortized over 30 years at around 5% interest, your monthly mortgage should be around $1,600, so the questions you guys want to start thinking of is: How much monthly rental income in your market in KS will cover the P&I and all other expenses and then be able to pay our investor a monthly disbursement of $250 (that is if you offer the investor 10% annualized return).

When you get some insights on that, and then you guys could pay yourselves a decent PM fee as well as your cash flow, if you are ok with those amounts, then it is not a terrible way to get started and get your feet wet.

Andrew Perkins · Answer

@Clint G.

Do you think an even split can be applicable on a buy and hold too?  Is an even split with both equity and cash flow asking too much if I don’t provide an equal amount of cash?

Your last point is definitely something I am trying to figure out.  I am very numbers focused and think that if I found the right deal, I would be confident in presenting it.  However, I am less confident in my ability to find it.  I will not make a move with their money unless I am very sure about the deal and it’s future success.

Andrew Perkins · Answer

@Jay Hinrichs

That is a good point.  If the investor puts up all the money and gets half the return, it doesn’t seem worth it for them unless we find a stellar deal.  What are some ways to provide more worth for the investor?

Financial Partner Deal Structure?

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