Partnership Agreement/Contract for Buy & Hold Investments?

[Chayson Descisciolo]

Hi everyone!

Working on getting into my first investment property and the plan is to partner with 2 friends. We're really just looking to get the first one out of the way and get a better understanding of the process of buying and rehabbing out of state. 

I'm trying to put together a basic contract/agreement. Nothing fancy, we're going to be splitting costs & profits evenly. I want to get a sample contract/agreement created so we can have it lined up and ready to go when we find a property. 

Anyone have any recommendations or samples on what a basic contract like this would look like or a resource they can point me to in order to draw one up? I'm not even sure what the proper terminology for this is (partnership? joint venture? something else?!) so I'm really not sure where to get started.

Thanks in advance!

[Katie L.]

@Chayson Descisciolo

You definitely will want to have an attorney draft up the document - I've seen too many DIY agreements that don't cover the person the way they want or thought they were covered and it ends up costing more in the long run to fix it than to just do it right the first time.  Particularly with unrelated parties, there are so many more unknowns and situations that can arise that the saying is true... you get what you pay for. 

Since you live in the great state of California, you're going to have a hard time avoiding the $800 minimum tax. Yes, LLCs are subject to the minimum tax, but limited partnerships are as well, and so are S-corporations. General partnerships are not subject to the minimum tax, but they provide no liability protection. A joint venture is treated as a general partnership. Also, limited partnerships need to have a general partner who has unlimited liability, so if you're looking for limited liability, you essentially would need to create two entities for an LP (the LP itself and an LLC to act as the GP). At that point, why not just do the LLC alone if you're trying to keep it simple. If you aren't worried about liability, then you can consider the joint venture/general partnership and look into adequate insurance. Even if you form your entity out of state, you will pay CA taxes if you are managing from CA, which equates to "doing business" in CA.

Depending on what kinds of activities you envision doing with your group, you should speak with an attorney for the right type of entity.  The analysis may change depending on if you are flipping, wholesaling, buying-and-holding, etc. and also whether you plan to use financing or not.

You'll also want to start thinking about such things as can you transfer your ownership share - what if one partner has children he wants to leave it to?  What if one has a spouse?  California is a community property state so you'll want to make sure to have adequate language and protections in your operating agreement depending on the situation.  Will all partners have full authority?  Do you want to require unanimous consent for certain actions or transactions involving a certain dollar amount?  What happens if one partner wants out and the others don't - will you have a first right of refusal included?  How will you calculate buy-out price?  What about management fees - what if one person is doing more work than the others?  And on and on... the more you can account for and discuss up front the better.  You want to make sure everyone is on the same page from the start.

Hope that helps some.  Good luck starting out!

*This post does not create an attorney-client or CPA-client relationship.  Readers are advised to seek professional advice.