Structuring Partnerships Fairly??

Question

Hi all!

I am relatively new to the Bigger Pockets forum space (albeit I’ve been following the YouTube channel for about a year now). I currently own 2 single family rental properties. However, my next deal I’m partnering with someone to acquire a small multi family deal.

My question is in regards to how to structure the partnership from a capital allocation standpoint. Do you guys tend to split the down payment and rehab budget 50/50? Or does one person normally put up all the capital while the other focuses on sourcing and closing the deal? I realize this is a pretty open ended question. Just trying to get different perspectives...

Daniel Dietz · Answer

@David White I am involved in a few different LLCs that hold rentals with various structures.

Most of them are with 2 relatives where we all put in equal capital, and are all active in some form; 1 tenant relations, 1 business relations, 1 maintenance. We all can clip into each others roles if one of us is out of town or not available. With these, we keep track of labor (using Toggl App, which can track it per ownership structure, property or task such as handyman, lease signing etc) and pay out that labor @ $25 per hour and THEN split all profits.

A newer form we have started using since we were out of 'down payment' funds is to bring on Private Money Partners - PMP, (who have also been Private Money Lenders on other deals). The PMP bring ALL of the down payment, usually 20% for commercial loans, and we do ALL of the finding, rehab management if needed, business work AND ongoing PM. We split everything 50/50. Cash flow as it happens, and when/if we decide to sell the PMP will be first to get reimbursed for their down payment amount, and THEN all built up equity will be split, whether gain or loss. We are able to EACH make a 9-15% return over the long haul. IF we were ever not able to DO the ongoing PM, the cost for that would come OUT of our half of the split.

This second method seems like a real win-win..... An investor can benefit from real estate investment with almost NO work on their part, and we can 'make money' from our knowledge and time instead of our capital.

Hope that helps, Dan Dietz

Steve Vaughan · Answer

A good partner is good at and likes to do things you don't like to do and/or are not good at.

2 people with the same skill set (or lack of) that are just twice as broke as required to take a deal down properly? Not so much.

If by 'small multifamily ' you still mean residential, I'd be inclined to buy as TIC with %s listed and have a JV agreement. Conventional lending will be more avaialble to you

If commercial, 5 units +, I'd be more inclined to form an entity like an LLC. Lenders expect that and you'll be in the commercial loan world anyway.

Better to grow slower alone than rush into a heaping pile of dung together.

David White · Answer

@Steve Vaughan Thanks!

Steve Vaughan · Answer

Tenants in common and joint venture.  Do a little digging...

David White · Answer

@Joseph Cacciapaglia That’s a good point. It’s great to see how flexible these things can be. Initially I was a little worried if I would be doing it “the right way”. But it sounds like you’re saying as long as both sides are happy and understand fully what they’re getting into, then there’s no “right” or “wrong” way to do it.

Joseph Cacciapaglia · Answer

One of my favorite law professors used to always say, "in life, you don't get what's fair, you get what you negotiate." I think this is important to keep in mind when structuring partnerships. There is no objectively fair way to split up profits. This is especially true when you have different levels of involvement. Is my time worth more than someone else's money? Maybe, but idk. I've found that often the person that's trying to negotiate a "fair" deal is asking for more than they deserve. You just want to be sure that you come up with a structure that everyone is happy with. I've seen a lot of partnerships fall apart because someone wasn't happy with their end of the deal.

For example, if you've put together an amazing deal, and you can give your equity partner a fantastic return even if you keep 75% of the profits, is that fair? Well, I think a lot of people would get hung up on you getting 3/4 and not putting anything in. However, if your equity partner is getting a fantastic return, are they happy? Probably so. If the deal you put together is just OK, maybe you need to take only 25% for your equity partner to be happy with their return. Is that fair? Maybe. But as long as you're happy with what you get, and so is the partner, it doesn't really matter.

Jon Kelly · Answer

@Daniel Dietz great insight, thanks for sharing!

@David White another thing to consider is adding an acquisition fee (2-3% of acquisition price) for finding the property or an ongoing "management fee" (2-5%) for the person(s) managing everything associated with the property (e.g. managing property managers, contractors, paying utilities, paying taxes, legal, etc.)

David White · Answer

@Steve Vaughan Could you clarify what a “TIC” is and a “JV” Agreement is? I’m not familiar with those. And yes it is a 4 unit apartment so it’s still considered residential..

Steve Vaughan · Answer

A TIC is how I would most likely partner on a residential purchase if a long-term conventional mortgage was sought. In my state, you need to be on the loan if on the deed. Different states may allow vesting without being on the debt I'd imagine.

I'm no lender or borrowing expert, but would think both parties sign for the whole loan, like a husband and wife do. You may own half, but are responsible for all.  No way to feasibly split half a bowl of soup.  RE is more like soup than a loaf of bread.

I've had a lot of commercial loans and don't like them.  TIC woukd be a way to get a conventional loan vs LLC commercial.

Daniel Dietz · Answer

@Steve Vaughan I have never done a TIC yet, but can see some advantages in certain cases, especially if a partner is doing a 1031. With financing, how is that handled? As in if I own 50% and you own 50%, do we each get a separate loan on 'our portion'? It would seem odd for both to sign 'for the entire loan' when we each only own 50%? Thanks for any insight into that area.

Dan Dietz

Structuring Partnerships Fairly??

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