Partnership setup?

7 Replies

So I would love some advice from my BP community on this question.  My partner and I would love to start marketing and finding property to begin a flipping business.  My partner currently lives in Jordan, but has substantial capital and is willing to split the costs with me 50/50 for marketing and running the business, but also is going to fund 100% of the deals with his own money through my lender.  I would essentially be setting up the business, building connections, fielding calls, screening them, meeting clients, putting houses under contract and over seeing the renovation and sale of the property.  Given all this info, what would be a standard split of profits?  Im having trouble figuring out the split amount.  Thanks!

How much would you want it to be if the roles were reversed.  When I'm the money partner I won't take less than 60% of the profits and I get paid before the non-money partners.  Normally, I'm going to be at 75%. If I'm the non-money partner doing all the work but have little to no capital in the partnership, I'm not working for less than 15% and normally will be 25-40%.

The only capital that I will put up would be for the monthly marketing costs, we would split those in half.  If his money does get tied up, because we have too many houses (hopefully), I can step in soon and be able to fund a deal as well.  

Interesting topic here, I am also wondering what other people think of this deal, or what other people have done in the past. I've seen other 50/50 splits between the money partner and the worker partner, but not sure what is most common.

Making sure incentives are aligned is a big deal in any partnership being successful.

I look at a lot of real estate investment memorandums for multi-family or commercial deals, the structure I see most often is a General Partner(an LLC run by you) who manages a fund on behalf of LP's(a separate LLC funded by your investor(s)).

The LP's pay the GP 1.5-3% yearly assets under management fee- this is based on cash contributed and or yearly cash returned but not distributed, usually used to buy the next property. This fee is supposed to help with administration/operations of the GP for the fund. Tax returns, K-1's aren't free. 

I also see a 1% acquisition and 1% disposition fee for the GP. This should cover costs of hunting/selling of the deal. Then comes the profit sharing. The fund pays the General Partner based on a hurdle rate, usually 6-14%. The hurdle rate is the minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, the riskier the project, the higher the hurdle rate.

Then profit sharing kicks in. I generally see 80/20, 70/30, 60/40 splits depending on the deal structure. The higher share goes to the capital source(LP's). Profit sharing covers monthly cashflow economics and overall disposition profits. 

This same structure works for flipping houses too. You don't have to worry about cashflow economics for flips obviously. 

50/50 has worked best for me. Easy to do the math and everyone is motivated in the same manner. 

I like the 50/50 split.  Its to the point, everybody involved knows what they will be getting out of the "net" profit.  I have seen it set up that both partners put money in, maybe not equal in amount, and they are both paid interest on that amount of money the length of the project, all expenses are deducted out, and then net profit is split 50/50.  I have a friend in CA that does it that way, it seems to work nicely.

I understand and agree on the 50/50 split. Do you have a standard written agreement that is executed on every deal? Like if I partner with person A only 1 time, would I have a written agreement between him/her and I? What if I partner with someone 3 times, is the agreement generic enough to use it for all 3 deals?

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