I’m a top producing Realtor in Pittsburgh and I have a few rentals. I’ve also flipped a few properties. Another investor and I are partnering with a contractor to start an LLC and to buy and hold a number of properties. Our attorney suggest that the three of us be the managers of the LLC and that we leave it open for members to join in as silent investors.
We have enough cash to get started, but we are toying with the idea of outside investors as silent partners. Right now, since there are 3 of us and we are going to be equally invested money wise, we figure we’ll split the return at 1/3 each.
Say on a given property, we each put in 10k. That’s 30k. If we have a fourth person who is a silent partner and they invest 10k as well and mortgage the rest. If in 10 years the property is paid off and the total profit is 160k, how should we split the return? I don’t think that 40k in profit each is right since the silent partner isn’t doing anything.
Limited partners have no say in the operation of the company and are usually compensated from the profits in proportion to their capital contribution. If my cash buys a 5% stake in a project, then I would expect to receive 5% of the net profit at sale plus 5% of the net income (or net loss) generated by the project during my ownership participation.
Rather than taking on partners, why not look for private lenders to contribute capital so you can expand your business. Instead of a share of the liquation value of the company, I would suggest a rate of return that would appeal to the investor for the use of their cash. Maybe a 10% interest rate plus a guaranteed return of capital at the end of five years, or, how about 8% interest rate plus 10% of the net profit when the property is sold at the end of ten years.
Just food for thought.
Check Usury Laws… Out here in California unless a Real Estate Broker, Department of Corporations Lender or Seller Financing is attached to the loan the max a lender can charge is 10% unless its seller financing…
Better take money from lenders at an agreed rate. It’s viable I guess and it will give you the clarity of transaction. I’m not telling silent partner is a bad idea but it gotta be viable. And that’s the main point “which one is viable at the end of the day”.