How to split profits in a Partnership

Question

I have a partner who I will be investing in my first flip with. How should we divide the profits if 1 partner is investing more than the other. For example If Im investing 20k and he's investing on 13k. How should we divide the net profits? Is there a specific formula?

Joe Villeneuve · Answer

So what you're saying is, and I'm assuming this since the only thing you mentioned was the cash being used, none of the following was or will be performed by either partner:

1 - Market analysis2 - Property Analysis3 - Presenting Offer4 - Negotiation5 - Closing6 - Property Management7 - Partnership Management8 - Rehab9 - Rehab Management10 - ...and more.

In other words, there is more to a partnership than just the money used to buy the property.  Not every task/role/responsibility is equal, but not every one of them can be equal to 50% either.

Nathan Gesner · Answer

There area  lot of ways to structure these. The simple answer: the percent you put in is the percent you take out. Add the total invested ($20,000 + $13,000 = $33,000) and then figure out what percent you've both invested.

$20,000 / $33,000 = 60%

$13,000 / $33,000 = 40%

I rounded up for simplicity sake. When you take money out of the investment, either monthly cashflow or equity after a sale, you split it according to this formula.

Make sure your agreement spells this out clearly, along with clear responsibilities. Who's managing the property? Who handles emergency calls and repairs? Who communicates with tenants? Who approves the Tenants, maintenance requests, early lease terminations, etc?

Be very clear about putting more money into the property. If it needs a $5,000 furnace, do you both pay 60/40 like you did with the initial investment?

If you have one person managing the property, you may consider paying that person a management fee, separate from the 60/40 split. This compensates them for the on-going work without having to calculate a larger return from the 60/40 partnership.

Joe Villeneuve · Answer

I would never use just the money contribution as a way of deciding the splits.  It completely ignores the reality that the money is only a small part of what's involved with a REI.  It's a very important part, but there are many other parts just as important, and you can't have more than 2 splits at 50%.

What if a person puts in the DP (20%), but is a silent, passive partner?

What if someone puts all the money in, and someone else finds the property, offers and negotiates, manages the business/partnership, manages the rehab, manages the property, etc...?

Eliott Elias · Answer

I would set a clear expectation of whats expected from each partner. One could put less money but have more sweat equity. It's clean and easy to split 50/50, give the guy with less money more responsibility

Anthony King · Answer

@Keith T Williams if you don't care about compensating eachother for your efforts at any point during the process then simply using your amount of cash invested as a percent of the total is a simple way to do it. I invest some with my brother and I'm much more involved and knowledgeable about everything we do. He tries every step of the way and learns as much as he can so I don't really care about compensation for the work put in. He also handles a lot of the menial tasks like utility bills, and phone calls, etc. Bottom line we're both involved and active so it works for us. What we did was create an LLC and if we purchase a property that requires $95,000 down payment and $5,000 closing costs and he puts in $35,000 and I put in $65,000, then our operating agreement for the LLC reflects 35% and 65% ownership respectively. It's a very simple way to do it, but if you're investing with an unrelated, strictly business partner, then additionally I would find ways to put a price on your individual efforts and discuss the compensation clearly up front.

Theresa Harris · Answer

If you are putting in 2x the money, then you should get 2x the profit, but you also have to decide on how to handle expenses.

How to split profits in a Partnership

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