Here's where most new investors start: "I found the deal, I'll do all the work, someone else brings the capital, and we split it 50/50."
In my opinion, that's really expensive money. Nine times out of ten, paying a private lender 10% interest costs you far less than handing over half of every dollar of cash flow, refinance proceeds, and sale profit on a deal where you're doing all the work.
Let's break down when to use debt versus equity, because this decision changes your returns more than almost anything else in how you put a deal together. If you're still deciding which partnership structure fits at all, start with how to structure a real estate partnership.
The Quick Math on 50/50
Say you find a value-add deal worth $1 million that'll be worth $1.7 million after you complete the rehab and raise rents. You need $300,000 for the down payment and rehab.
Option A: bring in an equity partner at 50/50. They put in $300K and collect half the cash flow, half the refinance proceeds, and half of roughly $700K in forced appreciation. Forever, or until you buy them out.
Option B: bring in a private lender at 10% interest. They earn strong, predictable interest on their $300K. You complete the value-add, refinance based on the new $1.7 million value, pay them back in full, and now you own 100% of the deal.
Full transparency: option B is my favorite type of transaction. Borrow the money, treat the lender well, get them their return, refinance them out, own the whole thing. It's a lot easier that way, and the interest you paid is a rounding error compared to half the upside. This buy, rehab, refinance loop is the BRRRR strategy, and it's how you recycle the same capital into deal after deal.
What Each Partner Actually Gets
| Debt partner (private lender) | Equity partner | |
|---|---|---|
| Return | Fixed interest (often 6 to 10%) | Share of cash flow, refi, and sale proceeds |
| Tax benefits | None | Yes, K-1 with depreciation |
| Liability | None, they're just a lender | Shared (JV) or shielded (LP) |
| Paperwork | Loan documents | LLC, operating agreement, possibly SEC attorney |
| Their risk profile | Wants predictable, passive income | Wants upside and write-offs |
The Two Questions That Decide It
When someone wants to fill the capital seat in one of my deals, I ask:
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Do they need the tax benefits? If yes, debt won't work. A lender gets no ownership and no depreciation. Structure them in as a limited partner (with an SEC attorney) or an active JV partner so the K-1 flows to them. And the splits can flex: a capital partner who wants write-offs more than income might get 100% of the tax benefits, a 5% return on their capital, and 50% of cash flow. Everyone gets what they value most.
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Do they just want a clean return on their money? Then make them a private lender. In my experience a lot of retirees land here. They don't want to decode depreciation schedules; they understand "6 to 8% on your money" instantly. You also skip hiring an SEC attorney, which starts around $7,500, because a loan isn't a security. Private lending is one leg of funding deals with other people's money, and it's the cleanest one to set up.
And yes, you can combine the two. A JV partnership plus a private lender is often the cheapest clean structure: two active partners form the JV and buy the deal, while a third person who wants no active role and no liability simply lends to the LLC. The alternative (making them a passive equity partner) triggers securities rules and an SEC attorney. That securities line is worth understanding cold, and I map it in Is Your Real Estate Partnership Actually a Security?.
The Hybrid: Preferred Return Limited Partnership
Sometimes debt doesn't fit even when the capital partner would happily be a lender. Two common blockers: they want tax benefits, or your bank won't allow a second loan on the property (private lenders usually want their loan secured by the real estate, and some commercial lenders say absolutely not).
The solution I've used personally: a limited partnership with a preferred return. I invested in a friend's local deal exactly this way. He found it, operates it, and got the loan on his own. I contributed capital as a limited partner and get a 10% preferred return plus the K-1 tax benefits, with no split of the extra cash flow, refinance proceeds, or sale proceeds. It behaves like a loan from my side, the lender stays satisfied because there's no second lien, and I still get depreciation. Best of both worlds, set up properly through an SEC attorney.
When Equity Actually Makes Sense
Debt isn't always the answer. Equity earns its cost when the partner brings more than money:
- Experience and loan strength. Commercial lenders often want net worth equal to the loan amount plus about 10% liquidity, and anyone with 25% or more equity in the LLC signs on the loan. If you can't qualify alone, an experienced partner with at least a 25% stake who signs the loan and mentors you through your first multifamily deal is worth real equity.
- A role you genuinely can't fill. If someone runs operations so you can keep hunting deals, they're earning their split every month. That's the whole point of matching people to the three roles in a deal.
The mistake is paying equity prices for money alone. Money is the most replaceable ingredient in a deal. If all you need is capital, structure debt, pay a fair rate, and keep your upside.
For the full breakdown of JV partnerships, limited partnerships, and private lending (including the legal lines between them), read How to Structure a Real Estate Partnership. And if you're a passive partner collecting K-1s, make sure you understand how those losses interact with your taxes; my REPS Time tool exists because the real estate professional status rules decide whether those paper losses actually offset your income.
I'm not an attorney or a CPA, and this isn't legal or tax advice. Structure questions have securities and tax consequences, so involve the right professionals before you take anyone's money.
