Originally posted by @Account Closed:
I would recommend the following:
1. Give your partner a preferred return on his investment. ie say 10% on his 20K.
2. After that split all the cash flow 50/50.
3. Lastly when you sell the property, give him back his 20K and then split the profits 50/50
Why. The plan you outline above is either a buy-in partnership in which case you do not really have 50/50 until the buy-in is complete and a lot can go wrong before that happens - OR - Its a loan from your partner to you to in which case a lot can go wrong as well. Lastly, there are some significant tax issues here and you really need to talk this over with your accountant and attorney. (at risk rules) Remember that your mortgage loan is most likely going to be "joint and several" meaning that both of you will be 100% on the hook not 50/50. That has the potential for all kinds of problems when only one party has actual cash in the game.
I like partnerships where that things are set going in so that when rainy days happen everyone know what's at play. Open ended partnerships always end up different from the original plan. Not to say that that's always bad but rather that when things are good, no one reads the documents, when things are bad, Article 12, paragraph 3, section 4.1 says......
You bring up good points, and I may be naive, but at those payouts wouldn't it be cheaper to just get hard money?
Why wouldn't you, for instance, just find a friend or family member with money and give them a promissory note at 10%, and get to keep the profits (cash flow and equity when sold, minus capital return) for yourself? Surely there is someone out there wanting to make 10% on their private money, no?
