My brother and I are debating whether to partner or not on a SFH REO deal in my area. He lives about 1 1/2 hours from me. He will be getting a traditional loan through the bank with 20% down payment. He will have to be the only one on the loan since I already have 2 loans under my name.
We are discussing different ways to partner on the deal or whether or not to partner at all. My wife will be acting as the agent in the deal.
My brother puts up all the down payment and owns the property outright. He pays me to manage and get tenants in the property.
What is a fair price to charge him for this? Is it common to negotiate an equity % ownership of property without putting up any money?
We both put up 50% of down payment but the loan is only under his name. We both take 50% ownership. How would we go about doing this since he is on title and I am not?
Or I put up 40% and he puts up 60% but I handle all the property management?
Does anyone have experience with these types of arrangments? Any advice would be appreciated.
Go 50/50 on everything. Contribute half of the downpayment and be a co-borrower on the loan (no reason you can’t be on a third loan). Go on title with your brother as tenants in common.
If repairs are required or mortgage needs to be paid out of pocket during your vacancy periods, then share all the out of pocket costs 50/50
If you are going to be the sole property manager, then agree with your brother on a fair percentage of collected rents to charge for your efforts and to cover your direct management costs such as advertising and mileage to show the property.
After you pay the mortgage and deduct your management fee, then whatever cash flow is left over is shared equally. When the property is sold, you also each share the net profits equally.
If you are not in a position to contibute to the down payment, then have your brother recover all his invested capital when the property is sold. Then you equally share whatever is left over.
Jeff - and whatever you and your brother decide to do, put it in writing. For example, you can be the property manager. But what if you are a lousy property manager and can’t get renters in the property or do a poor job in screening tenants? What if one of the partners want out? The agreement between you and your brother should spell out how to handle these and other situations. The more specific you are now, the better in the long run.
One option that you may want to consider is to form an LLC and take title under the LLC’s name.
If you’re sure you’re going to do this, I would set up the LLC in advance and let everyone know you’ll be doing the deal using the LLC. Expect all parties involved to be required to personally guarantee the loan since the LLC is brand new. A transfer to the LLC after closing in your personal name could trigger the due on sale clause, but there are varying opinions of if a bank would enforce that on a loan in good standing (especially in the current market).
Most banks will not loan to the LLC even if you guarantee it. The reason is that they want to sell the paper on the secondary market and the big players (Fannie Mae and Freddie Mac) won’t buy a paper issued to a LLC. The solution would be to close under your names and then deed the property to the LLC immediately after the closing. And as Justin mentioned this may or may not trigger the due on sale clause. I guess if you keep paying the mortgage, the bank wouldn’t care. But I don’t have personal experience with this.
Another option is to find a local bank that keeps the paper in house. They will be more likely to loan to the LLC (they will still ask for a personal guarantee though). But all the papers will be in the LLC name from the beginning. No due on sale clause to be worried with.
Another point to consider - based on my discussions with local banks the second option above would end up being more expensive. I found that you can get better terms/rates if you take the loan under your personal name. The loan to the LLC would be slightly more expensive.
Partnerships are a bad idea because the priorities of people change over time. Someone may want the money for something else. Someone may not want to the RE thing anymore. Partners disagree on the way to run the investment. You have a partnership no matter what you do and its best to formalize it and set out expectations, especially exit strategies (i. e. how a partner can cash out). The time to do this is before you actually do anything, when everyone is the most amenable.
My personal preference is you borrow the money and pay him back as you would the bank. The loan is secured by real estate and he gets no say in the management of the property. The only partner you need is your spouse.
If he wants a say in the management, then go with an LLC over a partnership. With the LLC, you are not automatically liable for what he does. Just don’t use some cookie-cutter agreement you get from the Internet. Work out all the details and then hire an attorney to put it into legalese. Don’t forget to spell out the duties and responsibilities of each partner.