Partnerships with Friends

[Ladd McClain]

My wife and I are teachers and over time have leveraged ourselves to several medium term rentals in the sweet spot between two hospitals. Nurses mostly. We've been self-managing for several years and have that dialed in. Unfortunately, we are tapped out for now financially but are starting to see some price drops in this neighborhood. We have partnered with one couple to go halfsies on a couple houses. 

Now to the question. We have other friends with money who have lots of cash and don't really need cash-flow. They have expressed interest in real estate as a way of putting their money somewhere safer than stocks et. We on the other hand have several kids going to college and do need cash flow. Every situation is unique, but what is a typical arrangement for a partnership where one party isn't bringing much money to the deal but is willing to do all the management, maintenance, red tape etc?

[Ben Firstenberg]

In this case, you could maybe set it up where you get an "asset management fee" every month and a small % of the deal, like maybe 10-25% and your friends get the rest of the equity and any excess cash flow?

I would think about it more like this: these people want to be purely passive investors. Passive investments in other asset classes typically average between 5-8% and stocks will do 8-12%. So I would target a return for them (call it 12-20+%, whatever you think) and then figure out the best way to get there. Maybe that means you give them 50% of the deal, maybe it means you give them 80%. 

Institutional investors also set up their investments with a "waterfall" structure, where the better the deal performs, the higher % of the profits goes to the "operator" and the passive investors get more total money, but less total %. It can get extremely complicated very quickly, so I don't know if I would recommend it, but depending on your situation it might be worth looking in to.