Partnering and seeking best practices

[40isthenumber]

Hello!

A good friend and I are about to partner to purchase a rental property in Metro Detroit. We are looking for inexpensive or free USEFUL contracts and ideas on how to set up the partnership. He will be putting up the $ for the house/repairs, I will manage the property and the subsequent tenants. We are dividing the equity based on the cash put in, and paying ourselves a "fee" from the rent in lieu of paying interest to a bank. My fee will come from the property management, his fee will come from the risk of his investment. I will buy into the house at a pre-determined rate until I have 50% ownership.

In this area there are several homes in areas that command 1100/month in rent (our target) that can be purchased for 35-50K. The lower end of that price spectrum will require 10-15k in work (conservatively) to command our desired rent.

We have done successful partnerships before on a smaller scale and are ready to take this next step. The next 3-6 months are being spend on due diligence for both of us before we put the final agreement together and purchase the property.

I have tremendous respect for MMM and this community, and would like to see what kind of insight that you can provide.

[arebelspy]

That's the type of thing I wouldn't trust free forms/forums to (and I have, in fact, consulted a lawyer on various real estate partnerships very similar to what you're describing).

That being said, for free advice (and you get what you pay for), BiggerPockets is the place to go for real estate advice.

Also here is a copy of a JV (joint venture) agreement that I found online a long while ago.  I've actually used a modified version of this myself.  It may give you a place to start.  I dumped it in my dropbox to share: https://dl.dropbox.com/u/9743562/sample%20jv%20agreement%20where%20owner%20is%20partner%20-%20Copy.docx

Again, if you do use this, each of you should have your lawyer(s) review it.

Feel free to ask any other questions and we'll try to answer, but keep in mind the above advice first.

YMMV, this post should not be construed as legal advice, etc. etc.

[40isthenumber]

That's the type of thing I wouldn't trust free forms/forums to (and I have, in fact, consulted a lawyer on various real estate partnerships very similar to

I agree wholehartedly- this forum is not typical however as the first response gave a great jumping off point with the sample agreement! Thanks for the good info. Our past agreements were much smaller and the level of risk did not require legal advice. I am a bit naive in how to go about finding a lawyer for this. Do you have any advice on where to start?

Also- I am quite handy and would like to do any updates that don't require a license myself to save $ for the overall business. Have you structured agreements that paid for one partners labor either in  cash or ownership? This may not be necessary depending on the property but we are seeking to cover all potential issues. After reading mmm's bfm we want to avoid that type of situation like the plague.

[arebelspy]

I agree wholehartedly- this forum is not typical however as the first response gave a great jumping off point with the sample agreement! Thanks for the good info. Our past agreements were much smaller and the level of risk did not require legal advice. I am a bit naive in how to go about finding a lawyer for this. Do you have any advice on where to start?

Ask your realtor for lawyer recommendations. Ask your title company for lawyer recommendations. And so on.  Eventually you'll hear the same names, the ones who do much of the local real estate work. It may happen very quickly depending on how big of a city you live in.  Go consult with a few until you find one who you are comfortable with.

Also- I am quite handy and would like to do any updates that don't require a license myself to save $ for the overall business. Have you structured agreements that paid for one partners labor either in  cash or ownership? This may not be necessary depending on the property but we are seeking to cover all potential issues. After reading mmm's bfm we want to avoid that type of situation like the plague.

Yeah, that's not an issue.  Really, what you should do is fully discuss everything you would like in the partnership, then just have the lawyer(s) codify it.  Don't go into the lawyer with only a vague notion of what you want, and expect them to figure out how your partnership should work.  You'll figure out what you want it to look like in practical terms, they'll describe it in legal terms to cover you.

Assuming your partner isn't a selfish a-hole (ala MMM's bfm), crystal clear agreements up front along with communication along the way is key.  Having to work something out in court should be a final, final, final (nuclear) resort.

[MooreBonds]

He will be putting up the $ for the house/repairs, I will manage the property and the subsequent tenants. We are dividing the equity based on the cash put in, and paying ourselves a "fee" from the rent in lieu of paying interest to a bank. My fee will come from the property management, his fee will come from the risk of his investment. I will buy into the house at a pre-determined rate until I have 50% ownership.

Just throwing out another idea: If your contribution will always be in the form of management, would it be easier - and far cleaner (in the form of far less arguing) - to simply have an agreement in writing whereby you take a certain $ or % of each month's rent for your fee? Are you wanting to participate in possible long term capital gains through an equity stake, or are you just looking to be partners by formally putting up some cash? Could you do it where you agree to a certain commission % for the first, say, $25k in rents (which would represent your 'equity stake, by taking a smaller % commission), and then after you reach that level, the rents after that are higher because you have a simulated equity stake (the higher rents were going to the other guy previously to pay him back his original investment).

I see the potential where he says "That house needed a lot of work, and I feel my sweat equity and value of remodeling was worth $20k", where you might think it's only worth $15k, and in order to buy your 50% stake, you have to pony up another $2.5k. If you want to eventually own part of the house, how about simply agreeing to a market value of the house at some point, and then save up your commissions and buy positions at 25% and 50% intervals?

Also, what is your exit strategy? 5 or 10 or 15 years down the road, if you or he doesn't want to be involved anymore, or someone has to liquidate their assets (think: lawsuit or divorce), someone moves away, etc....how would you value the properties for one person to buy out the other? By simply taking a set % of commission representing your stake, it makes the intermediate - and especially the exit - far more cleaner and neater. Not to mention the possible mess if one of you gets sued, and the interest in the partnership (and, by association, the other investor) becomes part of the lawsuit.

[MarkAW]

40isthenumber,
I am in a similar situation with my brother, where I put money in to fix up a house he was moving out of, and then I am taking over as property manager.  Did you ever come to a resolution on terms?  I am interested in what you settled in as my brother and I have a verbal agreement of sorts, but nothing in writing yet.

Arebelspy,
Could you possibly email me or put that sample JV agreement in a drop box location again?

Thanks,
Mark

[Daleth]

Agree that you need a lawyer. My understanding is that if you are a partnership, you will be treated as 50-50 owners from the get-go and so you need paperwork to reflect that that's not the case. Is the idea here that you'll receive equity, and a correspondingly increasing share of profits, in exchange for your work? You will definitely need a lawyer to write up a contract that says that, and that defines how much equity you receive for your work (e.g., do you get another 1% for every 50 hours? Every 100 hours? How is your time counted for this and how will you two keep track of how much equity you have?).

Who is actually going to be on the title of the property?