New Partnership for buying property. And sweat equity

[Chad Kastel]

I've formed a partnership for purchasing a property. My partner and I are trying to assign value and equity to each partner.  It's our first time working a deal with a partner and both want to be fair without being taken advantage of?

Jeff:  - Providing 100% of  the capital. 

                        -  Doing all the research and making the analytical decisions

                       - Does not live in the area planning on purchasing in

Dan:    - Grew up in the area and has intimate knowledge of the streets and connections

                          - Can do ALL construction and repairs

                          - Qualified Inspector

                          -  Will manage the property.

Jeff could just hire a construction worker, property manager, repairman,  inspector (and anyone else necessary) and pay them per diam.  But decided that based on Dan's skill-set he would rather give Dan sweat equity.  Jeff feels Dan will work harder and take care of the property even better if he owns a piece of the property.

The question is what is Dan worth to Jeff?   How much equity should Dan be able to work up to?  How does it scale?   If Dan was going to earn $500 per month for all his service, does that $500 get applied every month to his equity?  Or do we do it quarterly,bi-yearly, or annually to make tracking easier?

Thanks for all you help.

Chad

[Daniel Reyes]

@Chad Kastel

Hey Chad,

In this instance, I would err on the side of @Caleb Heimsoth's comment, and add - it is not typical to allocate equity or an LPA in this kind of relationship (0%). The typical way to maintain this kind of relationship is to keep this "fee-based"; inspection fee, property management fee, etc. In fact, for much larger multifamily deals, it is not standard for property management companies, who manage the day-to-day operations and manage capital renovations, etc. to take equity stake in the asset. I would recommend sticking to best practices here, unless there is quantifiable evidence to suggest otherwise.

All the best to you! Congratulations on the partnership, I am sure it will be productive :).

Daniel Reyes