Questions on typical partnership arrangements for 300k investment

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Questions on typical partnership arrangements for 300k investment

Charlie Van Norman
Flipper/Rehabber · Puerto Rico · Member since 2019 · 7 posts · 1 vote

Hi BP, 

Before I ask, I'm sure this question already exists but all I found were generalizations when I searched.. maybe I need to learn to search better! If you found something please let me know the terms you used.

OK here's the ask. Two partners plan to go in for a 300k fix-and-flip, 250k principle, 50k quoted by contractor, 12 month payments. One partner puts in 50% of the downpayment (let's call it 30k) and is 100% responsible for the deal, contractor etc.

Second partner puts in 50% of downpayment, another 30k, and is 100% silent / no responsibility.

Each partner pays 1/2 the mortgage every month and 1/2 whatever additional costs. 

Scenario 1: Property sells for 400k without complications. Profit is 100k - funding cost (call it 20k) or 80k. What's a reasonable / ideal split?

Scenario 2: We decide a refi + rent is the best option. Rent is 5,000/mo, mortgage and expesnes are 2,500/mo, so net income after taxes is 2,500/mo total. Working partner would manage the rental. What's a reasonable / ideal split? 

Scenario 3: Something I didn't think of?

Additional Q:

1. What google search terms should I use to pull up boilerplate paperwork for such a contract?

2. Should we get a lawyer involved?

Thanks in advance!

Charlie (Sacramento)

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  • Bob NortonPro Member
    Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
    6y

    @Charlie Van Norman You are only going to find generalizations, because the partnership split is whatever the partners want it to be.  If both are putting up half the cost, then the basic split would be 50/50.  However, the active/managing partner's efforts have value, so the partners should agree on a percentage that the active/managing partner gets first, then split the rest.  For instance, if that's 10% of the profit, then the split would be 10%+45%=55% to the active/managing partner and 45% to the investing partner.

    You should hire a lawyer to draw up the partnership agreement.  It will be worth the money, especially if things don't work out the way you planned and there is a dispute between the partners.  Make sure you hire an attorney who has experience in real estate partnership agreements.

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  • Charlie Van Norman
    OP
    Flipper/Rehabber · Puerto Rico · Member since 2019 · 7 posts · 1 vote
    6y

    @Bob that makes sense, I know it's whatever we agree. What I'm looking for is *examples* of how you've done or seen deals get done. For example you would rarely see a 50/50 or 99/1 split in this situation. But it would be helpful to me to know that usually 75/25 or 80/20 is common, vs 60/40 or 55/45, or all of the above.

    For anyone who has participated in a deal with one silent investor putting in equal cash, do you mind sharing your split numbers?

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  • Logan Vierstra
    Investor · Sioux Falls, SD · Member since 2016 · 72 posts · 20 votes
    6y

    I don't think anyone is going to be able to provide you an in stone number for that. It could be any of the above. It depends how much your investor values his cash and how much you value your time. If you are both putting in equal cash, but you are doing 100% of the work, it should obviously lean in your favor. If you considered a "normal" split to be one person invests 100% of cash, one person invests 100% of the time and they share profit 50/50 then in this case you might argue 100% of the work is worth 50% of the profit, and since you're 50/50 on the money side, that you should split the remaining 50% equally. In other words 75/25. 

    If the other investor puts more than 50% of the overall cash, maybe split the remaining 50% prorated to however much cash you each put in. Maybe to keep it simple just call it 2/3 profit to you, 1/3 of profit to him. 

    At the end of the day, the percentage doesn't really matter. Make sure the ROI makes sense for you, and it makes sense for him, then do the deal.

    That's one way to look at it. 

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  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    6y

    You are both putting in equal cash so your starting point is a 50/50 split.  In addition to putting in cash, you will be putting in management time.  You should get paid a fee for that time by the partnership.  The fee should be at market rate for property management.  Likely about 10%.  

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