Money Partner Deal Feedback

[William Morgan]

Ok so a co-worker and long time family friend of mine is also a successful commercial real estate investor in my area. When he learned about my plans to begin investing in real estate he wanted to get involved. I am 1.5 years out of college so I have about enough saved for a 3% down payment on an FHA Loan on an ok multifamily... i.e. not a lot of capital. We sat down after work yesterday to try to come up with a deal that works for both of us. What we came up with and what I am looking for feedback on is whether this sounds like a good deal and anything I need to consider that I may not have.

He wants to start an LLC with me 50/50 ownership. Problem is I don't have the capital to put the down payment down. So our solution is to have him put 100% of the down payment down into the LLC. 50% would be his down payment and 50% would be a loan (no interest) for my down payment. I would act as the live-in manager for the property for a gross rent fee of 10% - market rate paid by the LLC. That money (as well as surplus from my W2 job as an engineer) would be used to pay him back personally until I cover my half of the down payment. After that It would be as if I had the money today.

Budget is a bit all over the place. He stated he only cares about long term ROI on the property - mainly focusing on sustainable cash flow with the reasonable possibility of appreciation. So far we have looked at 150k-500k buildings and he said he would be willing to go up to $1M if it had a good ROI.

Location is Louisville, KY. 

This seems like an awesome deal for me considering I get a massive amount more leverage with him and this could be a jumping off point as well as being on the better end of the current value of money deal. I am planning on getting a contract agreement drafted by a lawyer before we purchase a property.

All constructive feedback is greatly appreciated.

[Craig Jones]

Hey William,

This sounds like it could have the makings of a great partnership.  I like that you have known this person for years and that he has experience in real estate investing that he is bringing to the table along with the capital.  

In my opinion it is important to keep in mind that you are forming a partnership with the proposed LLC. Buy and hold real estate investing is a long term game and partnerships have a very very high failure rate. I would say most fail because they are never given the proper attention before formation. Putting a plan together "after work one day" and then moving quickly to purchasing real estate is a recipe for disaster. I see you are planning to put together a contract agreement with a lawyer, which is good, but that agreement needs to be preceded with some significant discussions between you and your potential partner.

My wife and I recently looked at partnering with another couple on some real estate investments and other business opportunities.  We found an extensive list of questions to go through together which was designed to help us all understand each other better.  Over three separate four hour meetings we finally discovered that there were some significant barriers to moving forward together.  This came out in the third meeting, which means we had over eight hours of focused discussions which were all leading to a green light for the partnership before we unearthed the deal breaker.  

As a starting point I would run through all kinds of "What if" scenarios. What if the property is vacant and the LLC needs to make the mortgage payment? What if one of you does something that causes a financial loss for the LLC...how is that handled. What if each partner has a very different idea of how to move forward in an area of the business? What happens if your 0% interest loan is not paid back on time? What if one partner is not meeting their obligation to perform designated tasks?

I would want to make sure I share the same values with any business partner.  Make sure you both have the same definition of integrity.  Clearly define responsibilities of each member in writing.  

I have several partners on various properties and think partnerships have the potential to make a bigger and better whole than the sum of the individual parts.  You just need to make sure you treat the formation of a partnership with the respect and attention it deserves.