Tips on Partnerships?

Question

Hey BP! How do partnerships work in the real estate investing world? For example, let’s say me and 1 or 2 other individuals want to partner on a flip or BRRRR type of deal. Each might bring varying levels of value, work, etc to the table. Someone’s got the capital, someone’s got the time, someone’s got the experience, etc. Sounds like a great team, but how do you structure it (financially/legally) so everyone gets their fair share? Is an LLC involved? If using some financing, who takes out the loan? How do you ensure everyone is protected from someone walking away with profits? It’s not something I’ve looked into yet so there may be some obvious answers out there, but just wanted to hear from others and get a general idea! Thanks in advance!

John Franczyk · Answer

One of my former partners taught me that in forming partnerships, the Golden Rule applies, namely, he or she who has the gold makes the rules. If you're forming a new partnership with a money source, chances are that the money source will command a greater share of the partnership. The person who will do all the work can increase his or her share with an objective analysis of the deal that requires a healthy amount of high school-level math, but that is otherwise not complicated. Just remember that few intelligent money sources will be interested in paying exorbitant returns to an investor who professes to be willing to find deals and do all the work. Those sources will see ten to twenty deals a day, and they have the luxury of choosing the deals that give the best returns. Further, they may not admit it, but those sources are more likely to invest in the individual than in the deal. A finance source will generally gravitate to a fair-to-average deal that is managed by a rock star than to a stellar deal that is managed by someone who would screw up a two car funeral. When you've established yourself in the first few deals with the money source, you can command a bigger share of the partnership in subsequent deals.

Jim Pellerin · Answer

@Samantha Miller I have seen splits that vary considerably. I think a 50/50 split is a good place to start.

Daniel Dietz · Answer

We have two deals going right now for buy-n-hold rentals with Private Money - Silent Partners. They will bring the down payment of 20-25%, and we will do all of the finding, acquisition, rehab if needed. placing tenants and all ongoing property management. We will split both cash flow and equity growth 50-50, and they will get their capital returned either when/if we refinance, one of us buys the other out down the road (we are all planning at least a 10 year hold, barring any unforeseen things popping up) or the eventual sale of the properties upon retirement. One of the reasons we can ask for 50% even though we have no 'cash in the deal' (all though we do have probably in excess of 500K of our own funds into our existing properties, and they know that) is that we do already have 25 units which we have had great success with, and the Investors see that. We run less than 2% vacancy, have a waiting list of renters, and a great team of lenders, handyman, and other services lined up. I agree with John above that many Private Money people invest in the person/company as much or more than the specific deal, once you have established your reputation. The long term (10 years +) splits for each of us should be in the 8-15% range, a win-win if you ask me :-)Dan Dietz

Rebecca Knox · Answer

There are a lot of different ways to structure a partnership. If you talk to a real estate attorney, they will help guide you and your partners to be proactive on your operating agreement. Hope for the best, be prepared for the worst. Discuss each partner's expectations and what their role will be in the partnership. When people are partnering, there is normally something each side is hoping to get out of the partnership. A partnership should be less work, not more. My biggest mistakes in partnerships was not being clear of expectations/roles, not doing my due diligence of my partner's FACTUAL background in real estate (not what they show me or what I see on the internet) and verifying that they even had a system or SUCCESSFUL experience in what they were supposed to be bringing to the table.

Pedro Torres · Answer

This is something I've been trying to research for awhile. I'm in a position to provide some capital in areas like Toledo or Milwaukee but I'd rather not fly back and forth (I'm from Vegas) so a partnership with someone locally makes sense in my head. Not sure how practical it is though.

Samantha Miller · Answer

@Jim Pellerin Thanks Jim! Now let's say I find a great lawyer who can make sure the agreement is sound and legit. Who decides how the shares are split? For instance, if one person is fronting all the capital (i.e. the financial risk), and someone else is putting in sweat equity (time and energy), is that a 50/50 split? Are there any standards that people follow for that part of the decision?

Jim Pellerin · Answer

You need to draw up a sound Joint Venture Agreement that addresses all your points. There are lots of good templates out there. Or ask your lawyer to draw one up.