Silent Partner Real Estate Investing

by Mr. Cheap

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Thicken My Wallet asked me a while ago to post more about the multi-use building that I was involved in purchasing as a silent partner, and my experience doing that sort of deal. Just to be clear, what I mean by silent partner is someone who puts money into an investment, but isn’t involved in the day-to-day management of it.

Some time ago a buddy of mine, who has been holding my hand while I learn about real estate, contacted me with info about a building he’d found in a small Ontario town he lives near. He sent me the general building info, and it seemed pretty good ($400K, bar and retail store on the main floor and rooming house upstairs).

My friend likes to be pretty aggressive with real estate, so he never has enough cash to buy everything he’d like to. He also likes to mortgage to the hilt so that he has as much possible cash for the next purchase as possible. Given this, he’s quite open to partnering with people (and has done so successfully in the past with his sister’s boyfriend).

I told him it looked interesting, asked for an income statement (which seemed too good to be true, but we verified it). We put in an offer conditional on a property inspection (and my buddy negotiated a vendor-take-back mortgage).

After the inspection was completed (and we managed to get $25K knocked off the purchase price due to some potential problems turned up by the report), we set up a corporation (my buddy took care of all this), and recently completed the purchase.

Originally my friend was planning to live there himself, so he was going to manage it in exchange for living rent free, but in the end he changed his mind, and what we decided would be fair would be that we’d pay him 10% of the gross rent to manage it (and treat this the same as any other property expense), then we’d split everything else 50/50. I live in Toronto so wouldn’t have been able to do any of the management duties.

I went to tour the building, but for the most part deferred to my friend’s experience. This isn’t necessarily a course I’d recommend to everyone, but I’ve known this guy for about a decade (we met at university) and I was in his wedding party, so I’m willing to trust is judgement.

There’s a fine line to walk between doing business with someone you’re close enough to trust, but not doing business with someone you’re so close to that it might jeopardize the friendship. Some people trust more easily than I do, and some people are more able to do business and keep the friendship out of it than I can. For me there’s a pretty narrow range where business and friendship intersects (and I’m always nervous when I’m in that territory).

As an example, I could see my brother suggesting him and I buy property together (with him as the silent partner). I’d be very uncomfortable doing this, as if anything went wrong with the deal, I could see it causing problem with the relationship (and I don’t want to lose my brother over money). On the other extreme, whenever you go to “real estate networking” events, you’ll find TONS of people who are very excited to partner with you on deals. I’d say if you’re that sick of your money, just send it to me instead of losing it to them.

We’re still in the early stages of managing the property, so I’ll post more details in the future once figures start rolling in (and mention if we run into any problems).

I’m writing this late at night the night before posting, so I may have left out important details. Please let me know if there’s any holes in the story and I’ll be happy to fill them in! :-)

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{ 6 comments… read them below or add one }

1 The Dividend Guy

I think as long as you have structured the deal and partnership correctly you can protect a relationship. I have heard of people who say there is no reason to get a lawyer’s help structuring things because they are good friends only to run into problems if things go sour.

2 Mike-TWA

Well, Mr. Cheap, you done went and got me hooked, so I found myself meandering back in time through some of your related real estate posts. This property is intriguing to me because it’s so far outside of my range of experience. Given the commercial component, I assume you were looking at historical operating expenses on this property. Although it’s probably been too short a time to gauge this very well, how well have you done on evaluating the expenses on the property, particularly the commercial use part? Any surprises?

3 telly

Yeah, I can’t wait to hear the details of this investment in the future. Please keep us up-to-date!

4 abcstocks

Hi,

I would like to share my similar experience, its not in real estate though but in fast food frenchise. I am silent partner in 3 restaurants which sells Subs. We are 4 partenrs in total and other 3 partners are managing and running 3 restaurants individually. We are in business together from beginning and expamded slowly over 3 years. All terms and conditions are worked out and never had problem. I only help in early stages of setting up new business than I dont interfere at all, we have system to report profit every month and distributed regularly. TRUST is most importrant when you want to be in partnership either it is relationship or business.

5 Mr. Cheap

Mike: It’s totally outside both of our experiences before (I’ve only bought / rented the condo and my buddy has always done residential). The rooming house alone carries the building (plus nice profit), so the commerial element is just gravy, and seemed like a great way to learn about it, since we were both interested. We’ve shut down the bar (it was a dive) and we’re going to try running it as a banquet hall for rent for a while (and then perhaps try other ideas if that doesn’t work).

Supposedly there are alway surprises, so we’ll see if something bites us :-)

telly: Will do! When will we get the post from you about running student housing :-)

Dividend Guy: I agree completely. We haven’t structured the deal as well as we should have (for some reason I got pretty free-and-easy with it and let things just fall into place instead of doing as much due diligence as I probably should have).

Hopefully it doesn’t come back to bite me too hard.

6 Mr. Cheap

abc: Sounds like you’ve had a lot more experience than I have with this sort of venture! Glad to hear its worked out for you!!!

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