I’ve been asked to join a start up real estate group. The organizers first offer was 25% of operating profit and 25% of equity growth. Second option was 10% of rents and 10% of equity growth. What is standard if I’m a hands off investor and want to get in on a down market?
I think a LOT more info is needed for better advice, but in general, I recommend staying away from partnerships.
Particularly RE partnerships…
Can they work? Sure…probability…low…
If they are wanting to bring you on board for your money, then they likely want a silent partner.
But guess what happens when you give them money? You are no longer silent, and they don’t like that or want that.
Again, if you can give more info it can help on the advice input side, but don’t be too eager to share your money with someone else.
Bernie Madoff is at it again, is he?
Good points. I guess you can never trust someone fully, but this is a long time friend and a judge and most importantly, I don’t have the desire or the time to do anything other than invest. I think the market is at a historic low and may be there for a while, I have a little cash and would like to accumulate. If he puts in half the cash and I put in half the cash and then he is going to handle everything from finding properties, negotiating, scheduling repairs, getting them rented and collecting rents, then I’m trying to determine some sort of industry standard to compensate him for that. I’ve heard that property managers get 10% of rents, but I don’t know the scope of work a propertyu manager would do compared to what this guy is going to do. I’m really just an investor in a small REIT and looking for what admin costs would be fair.
Since it’s a long time friend, then be extra careful. That is if you want to keep the friendship.
Be sure to have very very specific tasks and roles and what is expected laid out, and I’d recommend a CPA to handle the fiancees and bookeeping.
As far as amount, yes, I’d say 10% - 15%.
get it in writing.
25% of profits? great. do you get 25% of losses, too? 25% of depreciation? what about tax preference items like Section 179 exp?
do you get 25% of the cash back? If not, how are you going to pay the tax on the 25% of profits you put on your 1040?
when they need more cash, and they get another partner, does this dilute your share? or their share? When they sell the property, how does the gain/loss get divided? How about the cash? If the property is foreclosed upon, who takes the hit? Who holds the mortgage? Does this partner get preference on interest expense deduction?
you need any atty.
and PUT IT IN WRITING. handshake deals get you killed. going into business with a friend usually ends up losing one (the business) or the other (the friend). Often both.
Exactly…what he said…