How to Structure a Partnership with Parents

Question

I'm looking for advice on how to structure partnerships in general. I'd like to bring my parents into a STR deal where my wife and I would present the majority of the up-front capital and handle all of the management, and my parents would provide additional seed capital to get us above a 20% down payment. Since my parents are at retirement age and would benefit from having extra passive income, I'd like to bring them in on a percentage of the future profits, but don't know what cut to give them based on the partnership.

For example, if I provide $40k and they bring $20k to the upfront costs, would it be fair to give them a cut of 20% of the profits but no equity since we'll be doing the management?

Also, how do taxes work in this situation? If, with the above example, my wife and I take 80% of the profits, is that the only taxable income in our case, and therefore all we have to report?

Thank you!

Sarah Kensinger · Answer

I almost wonder if a loan from your parents would be better than a partnership. You don't want to ruin a good relationship over a stupid house!!

Travis Timmons · Answer

I can't speak to partnerships...just not something that I have experience doing. As for setting up a short term rental, I have done that. 1. It's going to be death by a thousand cuts after you purchase the house. You going to bleed cash and spend a lot of money furnishing a place. Make sure that your parents (and you two) fully understand that. It's going to be expensive, stressful, and you'll have a "this better work bc we're spending so much money" pit in your stomach for a few months. @Trent Reeve can attest to that as well. 2. You need to figure out if your parents are equity partners or just a lender. Don't do a hybrid. You can base the payback on monthly payments or a percentage of profits. I'd recommend a higher percentage of profits until they are made whole on their initial investment. Like 50%+ of profits until they get their $20k back, then it goes to 20% in perpetuity, principal plus their interest rate, or until they get 1.5-2x their investment back (or whatever seems fair). Or if they are equity partners, they put in 33% of the money, they get 33% of the whole pie - profits, equity, etc. If it just takes another $20k to get you up and going, how much longer will it take you to save that amount of money? I'd prefer waiting an extra year to get started over partnering with family...just my opinion and personal preference (which is worth what you paid for it).

Lisa Graesser · Answer

Your parents can gift you $17,000 each tax free. You can essentially borrow that money from them and pay them back with interest, that will give them a little more interest than they can get in savings and you don't have to worry about a partnership.

Dave E. · Answer

@David Martin I would say more important that how you split equity and profit is defining roles and responsibilities in a partnership agreement. Be specific about who is involved In making decisions, what specifically that looks like. For example does everyone get a vote? Do all the votes have the same weight? Who specifically handles the money and has access to accounts, etc. Family can be difficult because of expectations that often aren’t discussed or formalized because we don’t think we have to with family.

Travis Timmons · Answer

@David Martin No problem...I've been there. It's going to be harder to get up and going than you expect but likely easier to manage once you are launched. Feel free to send me a DM if you have any questions or think that I could be helpful.

David Martin · Answer

1. Thanks for this reminder -- very easy to get caught thinking that once the house is purchased we're off to the races.2. Got it, lots of ways to go about this but I see why not doing a hybrid makes sense, and even moreso why it might be worth waiting to have that extra cash for ourselves and not have to worry about the complexity of a partnership. I appreciate your thoughts! It's clear you have some good experience in this area. Thank you!!

David Martin · Answer

Okay agreed, 20% is low. Thanks for your responses! Appreciate your time :)

January Johnson · Answer

Agree on this also. Dave Ramsey says, "The only ship that doesn't sail is a PARTNERship!" Begin with the end in mind!

January Johnson · Answer

Super good advice! Lots to think about here. This is why I love BP!

Alecia Loveless · Answer

@David Martin If you do decide to do a partnership even though it’s family make sure to have a formal agreement drawn up with an exit strategy written into it.