How does an investment partnership work for rentals

Question

John Thies · Answer

First thank you all for the advise sorry took so long to respond didn't realize I double posted and I have been crazy busy!  Life!!!! Anyways. Thanks you.  I think it does make best sense to use money to flip.  I bring lots of labor skills to the table and he obviously brings the $. We are both looking for the same things as far as future goals.  I don't have a lot of cash to put down but do have good equity in my house the wife would allow to get a loan on if needed. I do love that podcast 1 it's great!  Got lots of tips!  Will keep intouch with more questions!

Ali Boone · Answer

I'd say look for properties netting more than $100/door! I used an investment partner for my properties and the way it worked was he put up all of the cash required to buy the property (down payment and closing costs) and I took the mortgage and did all the work. Now we split the net (profit or loss) 50/50. But our margins are also $400-500 per door. That was a couple years ago I bought those when it was easy to find those numbers and there aren't as many now, but there are still some.

David Beard · Answer

I agree that a lending relationship is the cleanest, but you have to ask yourself if you need him, or want him, at this stage of the game.  Paying 8-10% is a big nut to cover when you're investing in decent quality rental homes that might only have a net yield of THE SAME AMOUNT as the loan rate, or at best slightly more.  That means little or no profit for you and you become a slave to this lender.

Do you have down payment money in order to tap cheaper bank financing?

Now, his funding would be ideal for flips (either flips to retail buyers or flips to turnkey investors).  I just question the viability for a buy-and-rent portfolio.

You can inject a lot more profit into the deals if he is willing to act as a credit partner to secure bank financing, then you'll have some significant profits to divvy up.

Of course, with you in St. Louis, you can also buy riskier properties (C class) with higher rent yields, where you could afford to pay him 8% and still rake a decent spread out of the deal for yourself.  Just recognize that those properties will be more work, with higher turnover and maintenance, and may be on the other side of town from where you live.

J Scott · Answer

First, there are no right or wrong ways -- there are dozens of different ways you could structure such a deal, depending on what each of you wanted to put into it and what each of you wanted to get out of it.

That said, if he has a lot of money and doesn't want to be an active part of the deal, my best suggestion to make things simple would be for him to provide you a secured loan against the property for a fixed return -- maybe 8-10%.  You'd pay him a monthly interest payment and then pay off the note when you sold, which would likely be after a pre-defined period of time or event.

J Scott · Answer

First, there are no right or wrong ways -- there are dozens of different ways you could structure such a deal, depending on what each of you wanted to put into it and what each of you wanted to get out of it.

That said, if he has a lot of money and doesn't want to be an active part of the deal, my best suggestion to make things simple would be for him to provide you a secured loan against the property for a fixed return -- maybe 8-10%.  You'd pay him a monthly interest payment and then pay off the note when you sold, which would likely be after a pre-defined period of time or event.

Jack Bobeck · Answer

John - If you have not done so, go and listen to the Bigger Pockets Podcast Show 1. It was by a guy in Phoenix who have excellent advice on how to figure out your buy/hold, buy/fix/flip business. He says everyone has a part of the business, you need to figure out what you bring to the business, if your partner brings the money. If he has money, great, use some of it on some deals, people who have money generally know others who have money, build a track record of buying, fixing and flipping to get more money from others, so you can buy $100 a door, but this time, you are buying 50 to 100 doors. Start small, automate your processes, and build a plan, make sure this is something both you and your partner want to do. Of course listen to all of the BP podcasts too, they are so valuable in information. I learn every time I hear them, over and over and over again.