I am looking to do a partnership with a friend from out of state. We are both very committed and have the same values and we think it's a good match. We've gone to a lawyer and basically the lawyer just told us that we can put whatever terms we want on the operating agreement and that it's up to us how we want to structure the partnership. We know so many people do this so we'd like to get some feedback from anyone who's done it before.
The scenario is that he's got some capital money and I do too. I'm able to put in 100% for the purchase price and rehab cost but we're investing in his state. So he'd be the one overseeing the work and managing the process as well as getting it rented and managing the ongoing rental after that. What would be a good structure for this partnership? My initial thoughts are that it would be 70/30 or 60/40. He get the 70 or the 60 and I get the 40/30. Simply because all I'm doing is putting the money in but he's doing all the sweat equity which in my mind is a lot harder. If not, what other ideas would you guys have for structuring the partnership?
Thank you in advance for any feedback!
You could get a better idea of share distribution by calculating his actual work. What is his time worth? How many hours will he spend? Is he bringing a special qualification to the deal like a real estate license, contractor background, etc, or is his "skill" just that he's local to the deal?
You may consider paying him for his time at an agreed rate "(e.g. $40 an hour) and then split the profit more heavily skewed to you. You are taking all the risk so you should get most of the reward.
It's a matter of thinking through the transaction, start to finish, define roles and responsibilities of each party, and then ensure a fair split of equity. There's no set formula so just do your best to make it fair to both parties, determined by contribution and risk.
You could simply be a private lender and get a fixed return with no risk.
You could do a 50/50 split after you receive a preferred return on your cash of 5-7% and pay fair compensation for your partners time.
You could just split 50/50
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