How to structure a partnership for STR

Question

Brian G. · Answer

@David Falk if I find a capital partner, my structure is as follows: capital investor signs for/buys the deal and I manage everything. All profit goes to the capital investor until they fully recoup their investment. After that, we split everything going forward 50/50. Equity and cash flow. I don’t need the money so don’t mind waiting to see a benefit. This prioritizes return of capital to your partner. You don’t make a nickel until they recoup their cash outlay. You get to trade their capital for your hustle. Just one deal structure among many!

Brian G. · Answer

@Marcus B Hsu yes definitely get things in writing, ie clarity is important. I have not done a partnership yet. But if I do have a capital partner in the future they would buy the deal and sign for the mortgage. If buying conventional they would add me to title after closing or perhaps at a future date once investor recoups their capital. All this would be written out in the agreement. If purchasing in an LLC the capital partner would fund the LLC and then we would buy. There would be a partnership agreement written up spelling out responsibilities, etc. I think it’s doable for their to be one party that funds the LLC initially and another that manages everything and be 50/50 partners, or whatever split is agreed upon. Find a RE attorney to help you if/when you do partner. They can help you with all the details. Good luck!

Grigory Pekarsky · Answer

It's difficult to find the perfect partner for your real estate investing business. You want someone who is qualified, reliable and trustworthy. But most importantly you need someone with the same goals as you. If you're looking for a partner in crime let me tell you about how I structure my partnerships:

No Attorneys Necessary – Everyone knows the legalities of real estate investing can be complex if you don't have an attorney on retainer. By structuring your partnership agreement yourself it saves money by not having to hire an attorney. Not to mention, if you're doing things for investment purposes anyway it shouldn't take long to type out a simple partnership agreement between just the two of you or other partners involved. Set Your Expectations From Day 1 – When you start working together you should immediately talk about expectations so that everyone would be on the same page.  If your real estate partner, for example, is expecting to use your connections to flip properties but you're not interested in flipping at this time it's important that everyone knows up front. That way nothing will be miscommunicated later on down the road. Make An Agreement On Splitting Expenses And Profit – You should agree early on how expenses are going to split and where the profit goes so there are no misunderstandings further down the line. This assumes both partners have skin in the game, which means they have cash put into the deal or money tied up in some other way. If one party doesn't have anything invested then they won't share in any profits or expenses because they don't have "skin" in the game. Keep Track Of What is working and not.  – If you're coming into the business as a silent partner and not doing much work then it's easy to just take your regular paycheck and leave. However, if you're actively working in the business then you'll know what is and isn't working for them. That's why it's important to be actively involved so you know how profitable things are. Be Respectful – If you don't respect or appreciate each other as individuals then this likely won't work out long term. It shouldn't matter if one person has more money than the other because that shouldn't determine how much you value someone else's the opinion/work ethic/etc.

Marcus B Hsu · Answer

@Brian Gerlach Thanks for the explanation. I did reach out to my attorney based on your suggestion,  their recommendation was either setup a JV or an LLC. Since I'm in California and I would like to avoid paying the franchaise tax annually, I'll probably go for a JV.

Marcus B Hsu · Answer

@Brian Gerlach, i like the deal structure you have. Do you have this all written up in some partnership agreement? and how do you make sure it becomes 50/50? like do you have to get your name onto the title? Would appreciate any insights you have as i'm starting to consider investing in STRs with a friend/investor.

Chris Levarek · Answer

@David Falk Partnerships are typically about understanding who has the time, capital and experience. Secondary considerations are what is your passion/purpose, tolerance for risk and location of investment. So what this means is, find out to which side of the scale you both align on those points.

What matters most to this partner? Work on emphasizing that point in the contract

What matters most to you? Work on emphasizing that point in the contract.

Jon Crosby · Answer

You can do whatever makes sense to the two of you, that's the beauty of real estate investing deals.  :)

It sounds like you want to invest time for money in the deal and he's the silent cash investor (so you would have a limited partner and managing partner situation)?  Generally on a first deal, the person putting in the money gets most of the benefit of the deal until you have proven that your 'time for money' is working and consistently dependable for the future deals.   So you could something like a simple 75/25 split on profits and if it works well you could go 50/50 on the next one...you could certainly also try the deal structure you mentioned above as well, but it's going to require more tracking and management is all.

Best of luck!

How to structure a partnership for STR

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