Real Estate Partners

[FrugalSaver]

I have a fair amount of real estate / rental experience and have a colleague that is interested in getting into the game.  I have much more capital available for down payments, etc than my potential partner. 

How would y'all recommend I proceed?  Cut them in on half the deal?  My goal would be able to help give back by providing them some real world experience with skin in the game but also continue to grow my portfolio.

Any thoughts?

Obviously, when money comes between friends, things get really weird so no worries about speaking to that concern of this idea.

Thanks!

[marty998]

Lawyer up. And structure the deals properly so that your interests are protected.

[tooqk4u22]

There are all kinds of ways to do it GP, LP, hard money, capital & sweat equity, purchase capital & renovation capital - but as Marty said absolutely get agreements done right. It has to be equitable, research equity waterfalls and preferred returns.

Aside from that you really need to understand your partner's willingness and ability to pay as needed and be sure they have a full understanding of the risks and timeframes etc. 

Personally, if I am bringing more capital and experience then I would only bring them in as a silent limited partner (ie no say - put your money in and you will get it back when it works or you won't if it doesn't). 

[dogboyslim]

I had a friend approach me about this.  I'm not a RE investor and know nothing about it.  He is well established with many properties, but was short on capital for a deal that he wanted to pursue.  He had proposed an agreement that would create a limited partnership in the rental with ownership based upon the percentage of capital contributed.  Management fees would be paid to the company managing the rentals (which he presumed would be his company).

I ultimately said no because I don't know anything about the business and wasn't ready to plunk down $50k to move forward, and it didn't look like I'd have any involvement in daily operations (which is normal in limited partnerships I think).  The approach he laid out did look fair to me, and did appear to protect both of us should the other flake.  Still, the mortgage is joint and several on a partnership, so it looked like too much allocation to the pool for me.  Because I knew I was out regardless of the arrangement, I never took it to a lawyer, but it would have been my next step, as well as talking through the agreement with another uninvolved friend in real estate to get her opinion of the arrangement.

Mostly: find someone that can review the arrangement and make suggestions, then get a lawyer to make sure it is all soundly crafted.

[Midwest]

I do hard money lending with a friend and am less wealthy than the other party.  I've made sure all agreements are in writing, treat it like a business  and each partner has the financial ability to absorb the downside if that happens.  Since I'm less wealthy than my partner, that means if I don't have the cash and/or the ability to obtain the cash , I don't rely on loans from my partner.

For example, if we are structuring a loan, each of us puts up 50% for a 50% interest in the note.  He has made offers to cover me (put up capital for me) on some deals and I've always turned him down. 

Recently we did a deal that was larger than my comfort zone.  I took 1/3 he took 2/3's.  He offered to cover me for the remaining percentage (to get me to 50%) if I would take the downside risk.  Turned him down because I didn't think it was fair for him.

If you treat it like a business arrangement and make decisions on that basis, it works much better in my opinion.  Putting things in writing helps jog memories as well.

[Patches]

I'm a minority partner on two separate real estate deals.  Each time we set up an LLC and - most importantly - a shareholder agreement.  Pick a lawyer, sit down with your partner and explain to the lawyer how you want the relationship to work.  Your lawyer will draft the shareholder agreement.

It's very important up front to have certain questions answered.  What happens if one person wants out... does the property hit the market or does the partner get first right of refusal? If it goes to the partner, how will you value the property?  Will it be sold as a lump sum or will there be seller financing among the partners?  What happens if a partner dies?  Do you want to end up being partners with your partner's heirs?

If you're the majority, keep your majority in writing.  You can yield to the minority's wishes as much as you want after the agreement is in place, but it's important to maintain a legal majority if you will be taking a majority risk.

[Bruinguy]

Are there other arrangements that would achieve your goals without becoming partners with him?  For example, could you pay him a fee for locating good investments for you?  Could you hire him to manage your properties?

That's where I would start.

If you do go in as partners, and you have the capital, what is he bringing to the table to warrant a 50% interest? I think 10%, plus management fees, is more common for the sweat equity (and assumes that he is providing the "sweat").

I'd also suggest that each of you have attorneys so you have someone clearly representing your interests (and his) in the transaction.  Not that it has to be some big negotiation.