Author Topic: splitting investment properties - advice?  (Read 543 times)

Rewdoalb

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splitting investment properties - advice?
« on: July 07, 2018, 11:55:19 AM »
Hey everybody!

I am interested in partnering with a good friend from school. We want to form a partnership to purchase a multi-family rental. Ideally, if we work well together, we'd reinvest profits into acquiring more properties, but at this point we are capital-constrained on the early end of our careers so splitting a triplex or similar would help us get started and also to problem-solve / learn together.

One of my big question marks is how we might divide the workload and compensation for this, since it's not purely "passive investing".  For example, if I find a good deal on a property and use my realtor license, could I take a commission for doing so?  If one of us handles rehabbing/repairs/maintenance, or hires someone to do the work and manages them, could we get paid for the time?  I am trying to consider this in terms of A) tax implications and B) knowing that one of us may put more time and effort in, and don't want anything to seem unfair.  It's simple enough to split the cost of the property and split the rents received 50/50 but the question is more around the time inputs. This will become more significant as we scale up, but I'd like to think it through on the front end.

Anyone have similar experience?  What am I not mentioning, that should be mentioned?

Fishindude

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Re: splitting investment properties - advice?
« Reply #1 on: July 07, 2018, 12:19:58 PM »
I would run the business like a business. 
Any legitimate expenses; realtor commissions, maintenance expenses, rehab work, etc. get billed to the business by the party doing the work, then the business writes a check signed by both of you to pay these expenses.   So long as you or your partner charge fair market rates for whatever work you do, no harm, no foul.

After expenses, taxes, etc. are paid and you retain some funds for the business, the two of you decide what profits you can take, then issue yourselves checks signed by both parties.
A good CPA would be very helpful here.

waltworks

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Re: splitting investment properties - advice?
« Reply #2 on: July 07, 2018, 12:22:39 PM »
The answer is that there is usually no easy/good way to do that (splitting effort/profits equitably) so you should either 1) avoid partnering, or 2) have one person hired at some agreed upon rate by the LLC/partnership and paid by the hour.

Friends and money, often a bad idea. What necessitates the partnership here?

-W

Rewdoalb

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Re: splitting investment properties - advice?
« Reply #3 on: July 07, 2018, 12:45:32 PM »
fishin, thanks, that is how I was leaning on the expense side but it's good to hear someone else corroborate it.  Fair market rates would certainly be key, and I think we could gauge that fairly enough.

walt, yes - partnership in general has some messy connotations, for good reason. Thanks. A couple thoughts going through my mind are:
- We are starting small. Just one property, let's see how it goes, give ourselves a way out if someone gets cold feet or wants to head elsewhere.
- one reason we are partnering is limited funds - I could possibly finance a simple SFH on my own but probably not a triplex without outside investors.
- another is that our skillsets seem somewhat balanced between realtor, tech, business, and construction, so if we complement well it should be a net gain.
- for me personally, on my own it'd be easy to just dump into stock ETFs / REITs instead. I get overwhelmed with paperwork and other such drudgery on my own and don't always *start* something well. However, when motivated by others i.e. having a goal with someone else and being accountable to that goal, it gives momentum to get this first project under our belt and see where it takes us.  If that is super stupid, I don't mind hearing someone's opinion as such. If it's risky with a few specific areas of caution, those especially are what I'm hoping to hear from you guys, so we can think it through properly!

waltworks

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Re: splitting investment properties - advice?
« Reply #4 on: July 07, 2018, 01:55:46 PM »
If it's a money issue, I'd just have one person loan money to the other at some mutually agreed rate.

Seriously, these things almost always blow up in one way or another. It's easy for reasonable people to disagree about what type of shingles to re-roof with, or whether a water heater can be nursed along for another year, or whether your time doing plumbing is worth the same as your time finding tenants or pulling comps to make sure you're buying the right place, etc, etc, etc. It's almost impossible to write something up to cover every contingency.

And that's assuming things go well. If you lose money, it's almost an automatic friendship killer. If partner wants to pull their money out but you don't have enough to buy them out... friendship killer. I could go on and on.

Get your buddy to just loan you money. Still might kill the friendship, but at least terms will be unambiguous.

-W

sammybiker

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Re: splitting investment properties - advice?
« Reply #5 on: July 07, 2018, 07:11:08 PM »
Definitely don't agree with partnering.

Pretty sure most of my posts here = what @waltworks said but seriously, I agree.

Let them loan you funds on this deal, you lend them funds on the next deal - but don't partner on one deal.  There really isn't anything to be shared on a small deal like this and more so, all of the relationship issues, difference in thought, discrepancies kill what could be a very positive and fruitful investor relationship when you enter into a partnership and attempt to split peas.

You go find your own deal and he supports you in that deal - physical labor, sharing contractors, funding, moral support.

Vice vs when he goes and finds his own deal.

You both celebrate when each other takes down a big one and you're there to support each other when you lose your ass, deal with shitty tenants or burn through contractors like firecrackers.

It's much more profitable, fun and durable doing it this way.
« Last Edit: July 07, 2018, 07:24:58 PM by sammybiker »

Fishindude

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Re: splitting investment properties - advice?
« Reply #6 on: July 08, 2018, 12:04:51 PM »
Don't let all of the negative comments on partnering scare you off.   I've been in multiple business ventures with partners and never had any serious disasters, most have worked out favorably.   They key is to manage and run things professionally like a business and keep everything on the up and up.

I would avoid situations where one guy wants to put in labor instead of money.   If you both put in equal money and just hire out your services to independent contractors, nobody gets screwed.

makinbutter

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Re: splitting investment properties - advice?
« Reply #7 on: July 08, 2018, 08:37:00 PM »
I think @waltworks is, as always, pretty spot-on in his recommendations here.  What happens when you and your partner decide to paint the room a different shade of color? Reasonable people can both have defensible opinions, and that'll only add up in terms of friction in the partnership in time.

Also, since you're talking about such a (relatively) small amount of dough, why partner up in the first place?  I understand you can't buy a triplex on your own in your particular geographic area, but nothing is limiting you to there.  Why not pick up a duplex/triplex/quad in the Midwest or South?  You'll get the same relative return (likely) that you would have from the more expensive triplex in your area, but the price of entry will be much lower.

Made-up #s to follow.

Your area
:
Triplex costs: 400k
down payment: 100k
Cash-on-Cash return: 10k, or 10% CoC

Other geographic area:

Triplex costs 200k:
down payment: 50k
cash-on-cash return: 5k, or 10% CoC

I bought all of my investment properties in lower-point-of-entry regions, and they return what are for me decent numbers.  HAve you considered going solo in a place where you can get your beak wet without a partner...?

Adam Zapple

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Re: splitting investment properties - advice?
« Reply #8 on: July 10, 2018, 02:23:30 PM »
Another option if you want to 'sort of' partner would be that:

-You loan him X number of dollars at a predetermined rate and set up automatic payments so there is no conflict between friends asking for money every month.

-You do the work of finding the property and analyzing the deal with parameters that have been set by your friend.  You are his realtor and are paid a commission when you find and close the deal.

-You manage the property as a normal property manager would at a normal rate.  You give him the option of firing you at any time after a 1 or 2 year term or you can opt out at that time.

-EVERYTHING IS PUT IN WRITING

This gives you three income streams and lets you get your hands dirty.

Just an idea.


Neo

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Re: splitting investment properties - advice?
« Reply #9 on: July 12, 2018, 11:14:06 PM »
Dont let these guys scare you. Partnership has pros and cons. Going alone has pros and cons. I have a partner that is a childhood friend and things are great. We are both laid back and not petty. Just know who you're going into business with and put together a good partnership agreement. Best of luck.

clarkfan1979

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Re: splitting investment properties - advice?
« Reply #10 on: July 13, 2018, 05:25:54 PM »
Partnering has more pros than cons. At a theoretical level humans can accomplish infinitely more by figuring out a way to work with others than try to do everything by ourselves. Learning to work with others is a huge predictor of career success. Try moving a couch by yourself and then with the help of one friend. Small investment from the friend and huge return for you.

I have two friends that bought a house together when they were age 25 because it was easier if they pooled their money. They lost money on the deal, but are still good friends and it was still cheaper than renting individual apartments.
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