Out of State Investor Interested in Local Partnership Ideas

[Jess Archives]

Has anyone been able to build a local partner as a remote BRRRR investor?

There seems to be two ways for this:

1. Partnering with a Core Four team
2. Partnering with one local person who understands the core four partnerships

I’m more familiar with 1 as there are plenty of content I’ve read up on that. As for strategy 2, there seems to fewer anecdotal experiences I’ve read up.

Strategy 2 has many different ways, which makes sense. Though there are qualities I keep seeing:

• The remote investor fronts the money, the local partner manages the BRRRR
• At refinance, the remote investor receives the initial investment and splits the equity difference 50/50
• Investor and local partner can also share the rental profit

Has anyone had experience for strategy 2 or see additional qualities for this?

*Note: I’m a well researched remote OOS investor. Currently doing strategy 1 for my first property. And am interested in strategy 2 to compromise for a more hands-off approach without losing higher equity gains as in a turnkey strategy.

[Chad Daniel]

@Jess Archives

Thanks for the thoughts and ideas.

I've been in discussions with some OOS investors (and one locally just yesterday) and in general, the OOS/investor would bring 100% of the funds, local/Turnkey (TK) provider (minus funds) would bring the team and do the legwork/project management. 

• I've thought about this from the local project management side, and from the equity point of view, and I'd rather buy 1 property myself than be 50/50 split with someone else on 2. That's because owning yourself has some efficiency (e.g. this discussion is not needed, my goals always align with my goals at a given time :-). 
• On the other hand, bringing resources together (e.g. OOS $ + local project management) can be a win/win.

Reviewing the scenario and numbers you mentioned, I don't think you can subtract the investment basis to bring one side to $0. I don't think A) can be reduced to B) and then to C).

A) "The question then becomes, how do you analyze value for

1. Investor's $49,000 of initial shared risk
2. Local's due diligence and $21,000 of initial shared risk"

B) "More simply put

1. Investor's $28,000 of initial shared risk
2. Local's due diligence and $0 of initial shared risk"

C) "or

• Investor $12,880
• Local $0"

C) ends up showing 100% risk+investment of time+$ on the investor side, and 0% on the local side. It would lead to the conclusion that it's 100% the investors deal.

In reality, and using the same numbers as you, I think we're left with this:

• Investor: $49,000 [58%]
• Local: $21,000 + $15,120 = $36,120 [42%]

Does that make sense?

Syndications are often structured so that the invested $ gets a preferred return, then the remaining profits are split by a predetermined amount between the General Partner (Local in this case) and the Limited Partner (Investor in this case). That puts the responsibility on the Local to make sure the asset performs as planned, and gives the investor security in getting the 'first' money created. The forced equity split, and operating income could be split the same way. For example:

• Investor: 7% preferred return year 1 (including forced equity and operating income), and following years (including operating income and net sales proceeds) + 50% of returns above 7%
• Local: 50% of returns above 7% (including forced equity, operating income, net sales proceeds)

I haven't sketched this out in Excel, but would seem reasonable to me.

In the end, both sides need to see the arrangement as a win/win and a good use of their resources (time, $). Simple to say. :-)