Considering taking on a partner for my business. Advice??

Question

Hello BP Members,

I have a profitable property management/RE development business and I am considering taking on a partner in order to grow the business quicker. I have been opposed to taking on a partner because I like controlling my own ship. However I need access to more cash in order to grow the company. I would also like to take this business model and brand to other states which I have never done before. (which would also take more cash than I have at the moment)

Any advice? I assume we would form an LLP? How much equity do investors want?

Rental income from the property is currently only $79,140/year but I have approval from the town to build 3 more duplexes. Once those are completed gross rent would be approximately $178,860/year. Assessed value is currently $450,000 and when its completed I predict it to be valued at roughly 1.5 to 2 million dollars.

What ownership is an investor going to want? And for how much cash? Also, how would future investments work? In order to grow this company and take this brand to other states its going to require significant further investments. Who pays for that?

Thank you for the advice!

James Klafehn · Answer

@Robert Wilson, Thanks, yes thats what I plan to do but I would also like to grow it quicker and take my brand to other states. Doing that on my own would take me a decade. With a partner/investor I could do it this year.

Any other advice?

Robert Wilson · Answer

I think you need a loan to build out the additional duplexes and then take the net cash flow and drive it back into the growth opportunities for your business.

I would treat the real estate piece separate from the property management piece. If they remain commingled, you're really just collateralizing the investment in a way that likely won't be advantageous to you as property owner of things don't scale with the PM company.

James Klafehn · Answer

I actually have two property management companies this one and one other. Both are doing very well and cash flow is excellent. I don't need any help managing them (which, in part, is what I am bringing to the table), I am just looking for capitol so I can grow this company faster. If the person happens to have experience with real estate land acquisitions that could help with out of state land purchases, but its not required. Mainly, I just need large cash investments from a reliable person. I don't want to give away equity in order to gain that but I have attempted to get large loans on my own and it hasn't worked out. I have also attempted to reach out to private lenders I have found on this site but they tell me they "don't invest in ny", "only invest in their area", or all of their funds have been lent out at the moment.

Your right, maybe I have watched too much Shark Tank but I feel like an investor is going to want a part of  this property management company/development company as well as future projects under this brand. Its one company. I got it started but I need capitol to grow it.

I don't want to give away too much info about my brand but suffice it to say that it fits a much needed niche and has proven to be highly desirable. There is nothing like it currently on the market. I know everyone things their idea is the best thing out there but this is real and its profitable.

Regardless, I don't want to focus on that. I just want to know how other partners structure buy and hold real estate partnerships. I don't know the first thing about partnering but I do know how to manage rental properties and build.

Dave Carpenter · Answer

James, I think I am a bit unclear on what part of your business you are looking to add a partner. If you currently have rental income from properties you own (the $79k per year) I would see that as your own business. To me it seems like you may need to bring on someone for the property management business and future developments to help with funding and maybe also faster scaling.

I cant see why you would need to cut a partner into real estate you already own?

Are you looking for a partner to provide value other than capital to speed up your growth?

It seems to me like if there is a way to structure the deal 50/50 then it makes a lot of things easier, but also takes away your majority ownership.

As for the amount of cash for the amount of equity, I am thinking of the scenes on the tv show Shark Tank where the "Sharks" ask the entrepreneur how much they want and all do the quick math to determine what the entrepreneur has valued their business at. Sounds like for you that might be the $1.4million potential valuation.