Partnership on a 3-plex in Iowa

[Ross Bauer]

I am currently working on a deal to acquire my 2nd rental property and my first with a partner. The way we have it worked out right now is that we are starting an LLC as 50/50 partners. He is going to put up the money for the down payment and basically be hands off. I will pay him back for my half of the down payment through managing the property. We both have construction experience and he is currently a contractor. If bigger projects arise we will do them together. We have been life long friends and I am excited to get the paperwork done and take over the property. The property will cash flow really well and we plan to keep all the money in the business.

I know partnerships can get tricky at times so I am looking for advice on what needs to be covered before we take on this adventure. Any advice would be greatly appreciated!! Thanks!!

[Ross Bauer]

Thanks for the reply!! We have nothing in writing but verbally we have discussed some of the things. We have agreed to write out an agreement on the terms of how we will operate. I was wanting to check with the BP people for ideas on stuff we didn't think of. I appreciate all the advice as I am still a beginner. 

The bank loan will be under the LLC and both of us will sign for it. I do not want to have anyone with more than 50% ownership and control of the entire property. Maybe this is the wrong approach but I feel if anyone has more control if things were to go south then it is a bad situation for the one with less. The decision making as far as what needs to be done with the property as far as managing and repair work that needs to be done will be up to me to make those decisions.

Either can sell their half to the other "owner" at anytime. But to sell the entire property it has to be mutually agreed to do so. Probably need to agree beforehand on how we will determine the sell price if one owner wants out. We have discussed that we will refinance and only pull out equity to buy another property. Details of this will need figured out for sure. 

To break down the deal we have made is we bought property for $112,500. He is putting down the 22,500. So I will owe him 11,250 plus whatever interest rate we get on the loan. My half of the down payment will be paid through the life of the loan or if I just pay it. I will get paid per month to manage the property and to do the accounting side of the business(my wife is an accountant). Plus I will get paid to do any repairs per hour and that amount will be predetermined. He will pay me half that hourly rate.(as I will be technically paying the other half). If we hire repairs done we will split that cost. So at the end of each year we will subtract the management, accounting, and repair/maintenance cost from the 11,250 I owe him. Which each year it will go down until that 11250 is paid. I will probably also pay him so much per month on my half of the cash flow to help get him his downpayment money back. Which if it works out could be used to purchase another property with the same downpayment. If I pay all of what I owe him for downpayment and we are "even" on the downpayment he will then pay me for his half of the management, accounting, and repairs.  Does that make sense? So say we are even and we cash flow $6000 a year his half would be $3000. We would then deduct 50% of whatever cost I do through out the year and take it off of his $3000. We will have to track this on a spread sheet and we will both always know where we are sitting with money owed. 

If I don't manage it we will split the cost for someone else to do it. With whoever is the contact for the management company paying a little less for their time. 

I do not know if this is a good deal or a dumb deal in the minds of the professionals but obviously I feel like I am getting a good deal and he does also or we wouldn't do it. But I also know that the professionals on here have way more experience and I consider all the advice. The numbers all add up to a healthy profit and the property is in good shape so we feel good about it. 

Thank you for your time in responding I really do appreciate it!! 

I read you invest a couple hours south of Des Moines. This property is in Creston along with my other SFH. You got any investments in the area or what direction south are you investing in?

Thanks again

Ross Bauer