Real estate partnership

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Topic Author
mushyyy
Posts: 64
Joined: Tue Jan 13, 2015 1:34 pm

Real estate partnership

Post by mushyyy »

I’ve made up my mind and ready to start with real estate with a friend.

I will put the capital, he will put the work (renovating the house).

I’m looking for advice on how to setup our partnership.
Examples:

-house price: 100
-downpayment: 20 ( e)
-mortgage: 80 (me)

For various reasons, i don’t want to just pay him for the renovation, but i’d like to spread the risk as well.

Let’s assume the renovation cost 20 (only COGS, no market price), would it be fair to have:

-he pays for the renovation and we split the eventual profit. If the sale price is 150, we split 15 each?
denovo
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Re: Real estate partnership

Post by denovo »

mushyyy wrote: Mon Jul 23, 2018 1:36 am I’ve made up my mind and ready to start with real estate with a friend.

I would walk away from this. Doing business with a friend is a quick way to end up with lost money and someone who is no longer a friend.
"Don't trust everything you read on the Internet"- Abraham Lincoln
riverguy
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Re: Real estate partnership

Post by riverguy »

Only you and him can decide what’s fair. How on earth would strangers on the internet be able to tell you this?
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unclescrooge
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Joined: Thu Jun 07, 2012 7:00 pm

Re: Real estate partnership

Post by unclescrooge »

mushyyy wrote: Mon Jul 23, 2018 1:36 am I’ve made up my mind and ready to start with real estate with a friend.

I will put the capital, he will put the work (renovating the house).

I’m looking for advice on how to setup our partnership.
Examples:

-house price: 100
-downpayment: 20 ( e)
-mortgage: 80 (me)

For various reasons, i don’t want to just pay him for the renovation, but i’d like to spread the risk as well.

Let’s assume the renovation cost 20 (only COGS, no market price), would it be fair to have:

-he pays for the renovation and we split the eventual profit. If the sale price is 150, we split 15 each?
If he is doing all the work, sounds like it's his deal and you're just the money partner. How does he want to split the profits?

Main concern is that he knows what he's doing. Otherwise you're paying a mortgage while he learns in the job.
Topic Author
mushyyy
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Joined: Tue Jan 13, 2015 1:34 pm

Re: Real estate partnership

Post by mushyyy »

I came here to learn from others, to find out if there is a standard agreement for situations like this.

He knows how to renovate a house, he lacks the capital to do it on his own.
cresive
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Re: Real estate partnership

Post by cresive »

mushyyy wrote: Mon Jul 23, 2018 6:42 am I came here to learn from others, to find out if there is a standard agreement for situations like this.

He knows how to renovate a house, he lacks the capital to do it on his own.

I don't think this forum can answer your questions in the way you are expecting. Your situation is personal to the two of you. One response had good clarification--you are providing start up capital and your friend is providing time and expertise. If you define the deal that way, determine a fair split along those lines, it should be fine. I am sure your friend is great at doing the work, and you will be friends after any deals are completed.

Unfortunately, you will have to make those definitions. I don't think there is a "standard" that the group can provide. It's not that your question is a poor one, it is just that your situation is not a general one.

Good luck, sounds like you have a good plan.

Ben
dekecarver
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Re: Real estate partnership

Post by dekecarver »

Keep in mind trying to make money by 1) laying out capital and 2) renovating is tied together by time. You guys will have to figure that out as a time delay (hidden renovation work needed) can throw a big wrench in the works. With the commitment from each of you, the work will get done, but there is a good possibility that the expected profit falls short until you hone your business model. I think I read somewhere (and I could be wrong) that one needed to start out with at least a 30% discount on the assessed value of the home to even start thinking of getting into this type of business.
Liberty1100
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Re: Real estate partnership

Post by Liberty1100 »

I think Biggerpockets.com is a better forum for this discussion. It is a free forum that covers topics all topics of real estate investing.

But since you asked here:
They say that you make your money when you buy. If the house is worth only 80k and you paid 80k for it, I wouldn't necessarily think that is a good deal. I would hope your friend can find a deal or bargain for the house. Say it is worth 100k but he can get the house for 80k. Worst case, you can sell the house right away and make 20k before any major renovations. Next, if the renovations are a success, then there even more profit to be shared.

I have seen deals similar to what you have in mind with the money partner splitting with the flipper 50-50 once the investment has been returned. You can even ask for a given rate on the money as well. Such as, say 10% interest on the money paid at the end before splitting of the profits. So, once the property is sold, you get your 80K + 10% interest for the length of time the money was being used, then split the remaining profits 50-50. Your partner would be incentivized to get the job done quickly.

*sorry for the scatterbrain.
renue74
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Re: Real estate partnership

Post by renue74 »

Liberty1100 comment about incentivizing your flipper is good. I've seen deals where "friends" get together and one has the capital and the other has experience. Most of the time, the outcome is that the project extends way past the estimated completion date and the friends fight a lot about completing.

Personally, I wouldn't do it. Most likely, you aren't going to have iron clad legal agreements in place and your friend has no ramifications from simply walking away. No skin in the game.
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unclescrooge
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Re: Real estate partnership

Post by unclescrooge »

renue74 wrote: Mon Jul 23, 2018 8:25 am Liberty1100 comment about incentivizing your flipper is good. I've seen deals where "friends" get together and one has the capital and the other has experience. Most of the time, the outcome is that the project extends way past the estimated completion date and the friends fight a lot about completing.
I think it was Charlie Munger who said when two people go into business and one has money and the other has experience, the experienced partner walks away with money while the money partner walks away with experience.

There are many different ways one could structure a deal. I don't get the impression there is a specific deal. Just two novices looking to partner together.

In general, a 50% split is okay, but after the first property, one of you may want to renegotiate the terms.

OP, tell us more about the experience of the partners.
How long can you support the mortgage?
What level of remodel is being done? Is it just cosmetic?
What happens is there is no profit, or even a loss?
SouthernCPA
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Re: Real estate partnership

Post by SouthernCPA »

In commercial real estate developments we do, we set up a "distribution waterfall." You usually have a developer doing the work and equity partners (the cash).

Something like this could look like:

Whatever profit is made on the eventual sale is distributed according to the following waterfall:

First, the Equity partner (you) gets a preferred rate of return of say 7%
Then, Whoever guaranteed the debt gets a 1% guarantor fee (1% of loan balance) to account for the risk taken by securing the debt (could be you or him, or both)
Next, any remaining profit from the sale is split 50/50, 70/30, 60/40 - whatever you decide is fair between yourselves.

This is an oversimplified version of how we do development deals for big commercial projects, but certainly something like this could be arranged between the two of you.
Topic Author
mushyyy
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Joined: Tue Jan 13, 2015 1:34 pm

Re: Real estate partnership

Post by mushyyy »

Thanks for thr useful comments, there isn’t one size fits all.

One doubt: should I pay the work of my friend or shall he do everything for “free” (he pays manhours and materials)?
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onthecusp
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Re: Real estate partnership

Post by onthecusp »

If he needs your money for the purchase does he need your money for the materials and to live on while renovating?

If the answer is yes, that is the only way the deal will be done.
If the answer is no, it is negotiable.

Either way it is not the only thing in the negotiation, you would offset the split in "profits" by the amount of the contribution.

If you are paying for everything, why not just buy a fixer upper and hire contractors, maybe even your friend as a contractor, not as a partner. Learn to be a general contractor. Because that is what the deal seems to be degenerating into. You take all the risk, pay for his time and don't get all the profit? That is not making sense.
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Pajamas
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Re: Real estate partnership

Post by Pajamas »

mushyyy wrote: Mon Jul 23, 2018 6:42 am I came here to learn from others, to find out if there is a standard agreement for situations like this.

He knows how to renovate a house, he lacks the capital to do it on his own.
I'm not seeing any real partnership here, just one party passively participating by providing funding to the other, active participant.

Seems like the standard agreement for a situation like this (flipping a house) would be the one used for a "hard money loan". The lender gets a higher interest rate than on the usual mortgage because of the condition of the collateral and the short-term nature of the loan.

When you refer to "spread the risk" it seems that you really mean "split the profit" instead of charging interest.
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Meg77
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Re: Real estate partnership

Post by Meg77 »

I would consult a real estate attorney who can probably tell you if there are standard deal terms in partnerships like this in your area. I do think it's fairly common to simply open an LLC, split ownership 50/50, and split profits 50/50 as well. Of course you can set up the profit sharing any way you like though.

Here are a few things a good partnership agreement must address though (known as the "D's"). What happens in the event of...
Divorce of either party
Disability of either party
Drug addition or other addiction/incapacitating situation
Disinterest (the other guy simply quits doing the job, or you take off to Mexico and quit answering his calls)
Death of either party

An attorney can guide you as to specifics regarding how to address each scenario as well as others. There are special insurance policies available and other contracts that may need creating or updating (wills, marital agreements) along with this partnership agreement.
"An investment in knowledge pays the best interest." - Benjamin Franklin
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