Partnering For Profits in High-Priced Markets
By Bruce Kellogg
The Situation Today Three Kinds of Partners
Alarge number of real estate investors and wouldbe investors live in highpriced markets . Large cash downpayments are necessary to make a purchase , and even more cash is required to achieve a positive cashflow . This can be discouraging .
One alternative that many in this position consider is “ Turnkey Investing ”, usually in rental houses in distant locations with local real estate support . This involves locations , companies , persons , and properties that are not wellknown or familiar , and which might , or might not , work out . For sure , the investor has only limited control over their investing fate . Then , if a problem arises , the investor has to jump in to right the situation to protect their investment . “ Passive investing ” this is not .
Investing Locally With Partners
It is not necessary for an investor to send their money thousands of miles to unfamiliar people to invest for them in unfamiliar neighborhoods with properties of uncertain condition and rental prospects . It is definitely possible to invest locally in highpriced properties with a high degree of control by the use of partners .
There are three kinds of partners : 1 ) a “ money partner ”, 2 ) the seller as a partner , and 3 ) the tenant as a partner . In each case , the approach is to set up the transaction so that the partner contributes in such a way that the investor profits , and the partner receives their benefit from the arrangement .
Partnering With a “ Money Partner ”
The principle here is for the “ money partner ” to bring in the funds necessary to make the purchase and set up a reserve to ensure success . There are four investing structures that are attractive based on the interests of the parties :
1 ) Limited Partnership ( LP ) 2 ) Joint Venture ( JV ) 3 ) TenantsinCommon ( TIC ) 4 ) Limited Liability Corporation ( LLC )
The partnership should be designed so that the “ money partner ” receives about an 8 % annual cash return plus an “ equity kicker ” upon liquidation of the investment . The investor needs to provide for themselves , as well , even if it means profiting only at the end . Obviously , the better the deal , the more the investor will profit and be able to compensate the “ money partner ”. Investors are encouraged to use a real
estate attorney to draw up customized documents for the partnership rather than doing it themselves “ on the cheap ” with internet “ pdf . documents ”. This is not a place to economize ! ( Hint : You can draw up internet documents , then have an attorney review them . That should save some money .)
As an example , three brothers pooled their funds to purchase a 3bedroom , 2 bath rental house in Hayward , near Oakland , in March , for an LLC that they had created . They put down $ 178,750 ( 25 %) on a purchase price of $ 715,000 , with a new 30year first loan of $ 536,250 ( 75 %) at 3.1 %. They paid “ market price ”, but the house was being sold by a retiring corporate facilities manager for a national company who had maintained and upgraded it impeccably . They rented it out for $ 3,500 / month in the Bay Area ’ s ultratight housing market . Their overall return is 2.7 % on their downpayment , but since all three brothers are in the top federal and California income tax brackets , and “ starter homes ” in the Bay Area appreciate strongly , and will for the long term , the brothers will see a nice aftertax return .
Photo by Tima Miroshnichenko from Pexels
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