How to Structure a Partnership with Parents

[David Martin]

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!

[Travis Timmons]

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).