Is this a fair partnership?
2 Replies
Chang Pan
Investor from Richmond, Virginia
posted over 3 years ago
I plan to work with my partner to use BRRRR method for investment. My partner will only provide a larger portion of the fund with no other work and I will provide a smaller portion of the fund and do all the management work (including finding the house, hire contractors for rehab, do paperwork for refinance and etc.). Each individual will owns 50% of the house while the cash out money will be reimburse to each proportionally. If we have to sell in a short term and end up losing money on a deal, we split the loss 50/50. I am a licensed realtor and if I get commissions from purchasing, I will tribute the commission towards the closing cost at the maximum allowed amount.
I am thinking about providing 20% of the fund while my partner providing 80% of the fund.
Examples: buy a house at 230k, rehab cost 20k. So the total cost is 250k. I will provide 20% which is 50k while my partner provide 200k. After rehab, the house is valued at 300k and we do a cash out refinance with 75% LTV and get 225k out - my partner will get 80% which is 180k back while I get 45k. If we cannot get cash out refinance and have to sell at 240k, each of us will take 5k loss, my partner gets 195k back while I get 45k.
My questions are:
1. Do you think it's a fair partnership? If not, what funding split do you recommend?
2. Is this kind of partnership a normal practice? If not, what is your partnership look like?
3. Any concerns / recommendations?
Thanks a lot!
Nick C.
Real Estate Broker from Tampa, FL
replied over 3 years ago
My opinion is that if your partner is truly doing no work, this individual should put up 100% of the funds for a 50/50 split.
The tasks you referenced are not easy and can be extremely time consuming. If you're doing everything anyway you're better off getting a hard money loan instead of putting up 20% of the funds. Pay some fees and keep 100% of the equity.
Essentially this person is giving you a short term loan, since you guys are refinancing out anyway, and getting 50% equity for it. Bad deal.
Changxuan Pan
Investor from Glen Allen, Virginia
replied over 3 years ago
@Nick C. Thanks so much for your input. This would be my first rehab so I am not sure about how fast I can move. In that case, I don't mind giving him 50% of the equity since I won't have the interest cost. I don't expect I earn a lot in the first rehab, just want some experience. I want to make sure what I proposed is not a bad deal for my partner who is a really good friend.