PARTNERSHIP STRUCTURE

We spent alot of time investigating the right way to establish our partnerships and consulted more then a few lawyers.  Most people I talk to use LLCs, but here is what we did...

Sadly we live in a litigious society here in the States. Asset protection was a number one priority when we started to open up our model to outside investors.  We wanted to protect our interests from litigious tenants, partners from them themselves, and partners from each other.  ie, the wrath of a husband or wife scorned could wreak havok on the entire partnership, not just their other half, obviously divorce is only one example...

We decided to purchase all of our properties in a realty trust.  They are considerably easy to set up and in some counties, you don't even need to record them.  This means the ownership entity is not so easy to discover.  Also, if you need to record them, you only need to record the declaration of trust - not the schedule of beneficial interest.  That means the beneficiaries are not easily discovered and adds another element of protection for the partners.  Doing it this way, I do not even need to know who the investors are when i buy the house.  IE, we could purchase 10 at one go, and not necessarily have the investor lined up yet... this allows me to add them to the schedule of beneficial interest later, and i do not have to do anything else regarding recording. 

The trustee of all the trusts is the management company.  The management company is a delaware-based LLC.  Delaware and NV are the two best states in which to register an LLC as the laws in those states heavily favor  the corporation. Yet another element of protection.

The beneficiaries of any trust are a Limited Partnership comprising the invested partners, the interested partner, and a General Partner, the management company.  You do not have to record the beneficiaries when the trust is recorded.  Even if you did, the beneficiaries would be an LP, and then the LP would then need to be researched - it makes it alot harder for a disgruntled tenant to find you. 

The General Partner is the entity who bears all the liability of the partnership.  So, we assigned our management company 1% of every partnership. Even if there were some litigation, and we lost, and the sale of the property were forced, the worst case scenario is that the plaintiff would get 1% of the sale... once again, the partners and their interests are protected.

Who are the limited partners?

I use OPM for most my my deals.  This frees me up to do other things. Sure, I could get mortgages, but i do not want to tie up my credit for future larger deals.So for the small deals, the investor pays for the purchase and rehab of the property 100%.  At the end of the rehab, the ARV=current MV, so if the market value of a house is, for easy calculation, 100k, then i make sure the purchase and rehab does not exceed 50k. That means there is instant equity. Anyhow, they, the capital-contributing invested partner owns 49.5% of the total deal.  my partnership, the interested partner, will be the other limited partner, at 49.5%

Why we hold and not flip right away is a discussion for another blog!  But thats the structure as it stands today.

Hope this made sense? (I am distracted by my elevated leg, i tore a muscle in my calf taking photos last week - who said photography wasn't a contact sport!)

I have a drawing that sums it up -  a picture speaks a thousand words.