I am trying to come up with the best way to split profits for a 3 person partnership.
We are looking to purchase a property for short term rentals. We are all planning to split the down payment evenly between the 3 of us, but only 1 person is qualified and will be on the actual loan.
If we are all on the loan and taking on the same amount of liability, than a 33/33/33 split sounds fair.
But if only 1 person is on the loan, what would be a fair profit split (with all other factors being equal)?
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
5y
@Aria Pearl I might guide you to be very careful here - if you are putting a loan in someone's PERSONAL name....well, I would just say to try to structure it differently. Meaning, a commercial or "portfolio" loan doesn't go in anyone's name. it's in the partnership name. That's important because if that loan is in someone's name...they are liable for 100% of the payment. But if they are only receiving 33% of the profits then they will be showing a big loss on that property. That might affect how they qualify for other loans. Usually loans that are not in your personal name are best for partnerships of this nature. Hope all of this makes sense.
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
5y
@Aria Pearl I might guide you to be very careful here - if you are putting a loan in someone's PERSONAL name....well, I would just say to try to structure it differently. Meaning, a commercial or "portfolio" loan doesn't go in anyone's name. it's in the partnership name. That's important because if that loan is in someone's name...they are liable for 100% of the payment. But if they are only receiving 33% of the profits then they will be showing a big loss on that property. That might affect how they qualify for other loans. Usually loans that are not in your personal name are best for partnerships of this nature. Hope all of this makes sense.
@Andrew Postell Yes the loan will be in someone’s personal name but everyone is comfortable with that since the trust is there. On paper that person will be liable for 100% of the payment, but each will share in 1/3 of the expenses and profit.
What we are trying to figure out is, should the person taking out the loan in their name (on paper), get a bigger share of profit / pay less expenses? Do you have any suggestions to structure something like this?
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
5y
@Aria Pearl my suggestion is to get a commercial/portfolio loan. That's what I am suggesting. Having a loan in someone's name has nothing to do with the trust. I'm talking about when that person goes to apply for another loan and their next lender sees that they are losing money on this property will that be ok? I don't know without reviewing their personal finances so I'm recommending something blindly but based on the hundreds of other scenarios that I see with this type of setup a commercial loan is a better product.
I am trying to come up with the best way to split profits for a 3 person partnership.
We are looking to purchase a property for short term rentals. We are all planning to split the down payment evenly between the 3 of us, but only 1 person is qualified and will be on the actual loan.
If we are all on the loan and taking on the same amount of liability, than a 33/33/33 split sounds fair.
But if only 1 person is on the loan, what would be a fair profit split (with all other factors being equal)?
Thank you in advance for your input!
Hello Aria @Aria Pearl
How did you end up splitting. In exact scenario right now. Thanks!
I am trying to come up with the best way to split profits for a 3 person partnership.
We are looking to purchase a property for short term rentals. We are all planning to split the down payment evenly between the 3 of us, but only 1 person is qualified and will be on the actual loan.
If we are all on the loan and taking on the same amount of liability, than a 33/33/33 split sounds fair.
But if only 1 person is on the loan, what would be a fair profit split (with all other factors being equal)?
Thank you in advance for your input!
You could set up and LLC and state in the operating agreement that all profits and losses will be allocated per the capital contribution of each member/partner. As a general rule of thumb, profits follow losses. So, if there is no written agreement in place and one person is covering the majority of the mortgage payments and rehab costs, that person would/should be entitled to the pro rata share of their contribution(s). Basically, % of the money in overall = % of the money out (profits) for each individual.