How to Partner up an Investor and a Handy-Man?!

Question

Hello ALL BPrs. I'm here to brainstorm yet again and I need some advice as to how to structure a potential partnership between myself and a carpenter:

Here's the story:

My mom's ex husband is an extremely skilled carpenter, but he can also do pretty much everything related to electric, plumbing, drywall, painting; essentially if the roof and foundation are good, he can do 99% of the work.

He has done tons of high quality work for my mom, her family, and her neighbors, and he barley charges for the labor if he does at all.

The Question:

How would someone like me, who is business minded and has access to capital, partner with a carpenter willing to put in a ton of "sweat equity"? Both of our goals are to hold property for long term rental income. But I believe, in addition to acquiring property and rehabbing at a discount, we can also create additional income by establishing a small handy-man/ rehab/ contracting business with the money we save from him doing the work.

Specifically:

1. Is there a common or "boilerplate" agreement/ legal structure that would best fit the situation?

2. What's the best way to position the partnership for growth on both fronts; "in house" acquisitions and offering light to medium duty rehab services to the public?

3. Has anyone had experience in balancing capital contributions with sweat equity (in any RE transaction or partnership)? How did this work for you/ and what pitfalls that may come along?

J Scott · Answer

If all he brings to the table is contractor skills, then why not just pay him as a contractor?

By making him a partner, you have LOTS of new issues to deal with:

- What happens if he doesn't do a good job?

- What happens if he gets hurt and can no longer contract?

- What happens if you guys have a falling out?

- What happens when you need to pull permits for things like electrical, plumbing, HVAC, etc, and you have to bring in licensed contractors -- who pays?

- What happens if he gets busy with other projects?

- What happens when he needs more cash flow and you can't provide it with the "sweat equity" in your deals?

- What happens when you disagree on the rehab scope or quality?

You should be paying your "partners" for what they bring to the table -- if they are only bringing contracting to the table, pay them for that (fixed bids, not equity).

If he's bringing more to the table than contracting, we'll need more info...

Triston Murray · Answer

Thanks J and Carlos for weighing in on the issue! When presented with all of the scenarios that could arise it definitely makes more sense to pay him as a contractor, and possibly discuss a partnership when we both have skin to put in the game. Thanks for the quick replies!

Carlos Fojo · Answer

From experience, pay him for the contract labor he performs on a specific job. If he wishes to invest his profits then with an LLC or a limited partnership have him invest equal parts. You are going to have to pay for labor costs anyways, so why not compare bids and if he is a reasonable bid award him the rehab and pay him the labor that he deserves. Nothing wrong for paying for what others do that bring value to your money.

But to partner him up because of sweat equity, I definitely do not agree. Pay the man for his labor and at the end you will have a better outcome. If he wishes to invest (skin in the game) then and only then would I consider a partnership on that deal. Be upfront, this will always keep you and him in check. He does not have to be a partner on all deals, nor do you have to hire him on all of your deals.

Start the relationship with an open understanding of what is expected and do not let his labor stand in front of your and his profits. He is entitled to be paid each and every time he labors. The final net income is what is dispersed of in the partnership. In my opinion set your goals up front. Whether you chose to expend all of your proceeds at once or utilize the 1/3 rule as I call it. 1/3 of all net to you, 1/3 to your business (reinvest) and 1/3 for the future (passive income) buy and hold property (retirement fund).

How to Partner up an Investor and a Handy-Man?!

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