Using a trusted partner to buy low money down deals every year

[Brad Johnson]

My younger sister is looking to start investing in real estate after seeing me have some success recently. I have 2 SFR and she is a no debt recent graduate.

The strategy we’ve talked about is for her to owner occupy one unit at a time of a MFH while we renovate the others. We’d both be on the loan. I would put up all the money in the deal, closing, down payment, rehab, maintenance and manage the property (we will probably get PM but i will manage all that and renovations, future deals etc). Then we rinse and repeat after she fulfills her year of occupying the property.

So I bring the business/financials/experience and she brings the ability to get 3.5% down and flexibility of renovating the units fast.

The property in question is a $400k quadplex that is fully rented at $3400/mo income. One unit is recently renovated and priced much higher than the others so I think closer to $4k/mo would be market rent for $20k in renovations.

I want to fairly pay her of course so that this will be the start of a good partnership for us both. But what is fair? It’ll take me about $40k-$50k out of pocket the get the property and renovate it but that would be 3x as much without her. My first instinct was a 90/10 split. Is that too much or too little?

Maybe just a very low rent option during the year she occupies? Like half priced rent or less? That would likely be a better ROI for her during the year but obviously if we continue, having multiple 10% properties would add up fast if the market continues appreciating like it has (big IF)

Then I’ll take full advantage after the year and she’ll be able to build up a nest egg much faster so we can do bigger deals together down the road?

And yes I’m also considering the risks of going into business with family etc.

[Davido Davido]

@Brad Johnson, as mentioned by @Brenden Mitchum and @Jonathan Greene there are real dangers of developing discord when working informally with friends and family.   Discord will be avoided be not working together, but that is hardly a satisfactory outcome.  A solution is to formalize your business arrangement and keep it strictly business.  

Work with your sister to set a value you both agree on for each service that each person provides to the partnership.  Write out what each of you is expected to contribute and what share of the business each of you will receive for each part you contribute.   When a new service or business function is needed, write out a new or expanded operating agreement.  

There is good reason to set up all of your cash contributions to the partnership as a formal loan.  Establish an agreed interest rate with each new loan.  Decide whether your principal will be returned slowly in monthly payments or in a balloon payment due on a certain date.  Treat your partnership as a business and you'll each become better business people.  You'll each see the necessity, the value and the costs of the money your partnership needs, and you'll be able to quickly compare your current cost of funds with the market rates.

When you can not reach mutual agreement on the value of a service provided, disagreements can be settled by having one person create a proposal he/she believes to be a fair arrangement, then allowing the other partner to choose which side of the proposal to accept providing the service required, or paying for it (from his/her share of the cash flow).  Basically one of you bids to do it for $XXX.XX  or to pay your partner that amount    Alternatively, any function or service needed by your partnership can be put out to bid in your local marketplace.  However, you can only pay others for the services required to run your business if you have adequate cash flow.

I say do it.  Just write out your expectations and stick to what you wrote out or what you can mutually agree to change.