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Partnering on a Real Estate Investment

Tuesday, August 25, 2020   /   by AJ Shepard

Partnering on a Real Estate Investment



Trent:

All right. So for my presentation today, I want to talk about partnering on a real estate investment deal, the different types of partnering, and what to look for in those different partnerships. So obviously one that a lot of people are familiar with, 50/50 partnership, you split the equity, you split the cost, you split the profit, everything right down the middle, and you work together to manage it.

Trent:

The other type is a credit/capital partner, and a management or construction partner. So in this situation, the credit and capital partner would basically be the financing behind the purchase and holding the loan and their name, and then the management/construction partner, if it is a rehab project, like the one I'm standing in currently, they would manage the construction and the rehab of the project, and then you would form an LLC. The LLC would then hold the title, but the individual that's the credit capital partner would hold the loan in their name, and so the management/construction partner wouldn't have a loan in their name, but they would have equity in the project because of the rehab and construction that they did to get the property back to where it should be.

Trent:

Another type of partnership would be different equity splits, so a 25/75, 30/70, whatever it may be, 60/40, all that stuff. When you're talking, about those types of partnerships, you really got to dial in the responsibilities of each partner. So if someone's going to bring more capital to the table, let's say they bring 75% of the capital required to buy this project or buy this property, or project if it is a rehab project, what is the person or the people or the entity that is not going to have as much capital invested, what are their additional responsibilities going to be?

Trent:

So, if someone brings 75% of the capital to the table, maybe the other person that's not bringing as much is going to manage the project, if it is a rehab project, manage the tenants, making sure the units get leased up, making sure that rents are being received, all expenses are being taken care of. And then that capital partner or the partner that provided more capital at closing, wouldn't have to do as much legwork every month in terms of all that management stuff, and they would just collect their disbursement once it is disbursed for that month.

Trent:

One other thing to be aware of is, forming an LLC for partnerships is probably the easiest way to protect yourself without having to draw up a bunch of legal documents. It's important to have an operating agreement in place that all parties agree with because having a bunch of just word of mouth and handshake deals is great if you know the person, but in order to protect yourself to the best of your ability, spending the 100, 150 bucks to form an LLC and keep it registered every year is probably the easiest way that anyone can protect themselves in a real estate investment.

Trent:

One other example I want to talk about is the credit/capital partner and the construction partner, one way to work that is that the capital and credit partner brings the capital required to close as the down payment for the property. And then if it's a rehab project, once it's done with construction, that partner's going to hold the refinanced loan in their name. In order to accomplish that, there's a transfer of title that has to happen and all that fun stuff, but I'm not going to get too far into that today.

Trent:

So if one person brings the capital and holds the loan in their name, what's the other person going to do, or the other entity going to do to carry their weight? Well, they're going to manage everything, they're going to manage the construction, all the rehab that has to get done to get the property back to where it should be, that partner is going to manage all that, manage the contractors, and most likely even finance the rehab budget. If they're not going to use our own cash, they're going to be the ones responsible for obtaining that rehab loan and making sure the construction gets done on time, on schedule, and the way it should be. So, that's kind of what that breakdown would look like.

Trent:

So in terms of partnering on real estate investments, you can get super creative, you can do a bunch of different partnerships styles, LLCs, whatever it may be. You could have a handshake deal, you could partner with your parents. There are so many different ways to structure a real estate investment partnership, these are just the three most common ways that I've seen and I've used personally that I know work, they protect you, especially if you do the LLC and have an operating agreement that everyone signs, everyone's a member of the LLC. As I said, it's really affordable, not hard to keep up, and it's going to protect everyone involved in that investment. So that's my brokerage presentation on different types of real estate partnerships and agreements, if you have any questions, let me know.

Speaker 2:

Sweet. I liked it.

Trent:

All right, that was mine on the fly video.

Speaker 2:

Yeah. What's your favorite thing about partnerships?

Trent:

Probably the fact that you can have more than one head working on it, more sets of eyes, and it mitigates all the risk from one person or entity and helps minimize that by spreading it out.

Speaker 2:

Nice. When you're looking for a partner, what are the reasons to find a good partner?

Trent:

It kind of depends. I mean, for me personally, I'm not very financeable, the being self-employed and all that fun stuff, so having a partner that has a good W-2 and can obtain loans is definitely a benefit of finding a partner. Or maybe a partner has connections or has the ability and resources to handle construction better than I [inaudible 00:06:44] has more experience than me, and I can learn from a more experienced partner if they are able to partner whatever real estate investment that they're trying to [inaudible 00:07:10].

Speaker 2:

All right. You broke up a lot in there, but that's okay. I think what you tried to say was finding someone that compliments you is a good way to start looking for partners.

Trent:

Correct.

Speaker 2:

That has something that you don't. Okay, cool. Anybody else has any other questions?

Speaker 3:

Trent, where would you go to find partners? Do you have an online presence for that or word of mouth or...

Trent:

Word of mouth for the most part. There are ways to have an online presence and obtain partners that way, but you have to be careful with all the making sure the whole accredited and SEC stuff that goes with that, which I don't really know a whole lot about, but just your sphere and people that want to get into real estate investing, I would say is the best way.

Speaker 4:

Would our [inaudible 00:08:16] event be a good source for that?

Trent:

Yes, that is a great potential source for partnering on real estate [inaudible 00:08:25].

Speaker 2:

Cool.

Uptown Properties
Chris Shepard
3526 SW Troy
Portland, OR 97219
503-941-0276
Fairway Independent Mortgage Corporation
Mike Maier
5410 SW Macadam Ave, Ste 100
Portland, OR 97239
503-545-9879

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