How do returns with 4+ people partnering on a deal work?
Real Estate Agent · Tewksbury, MA · Member since 2020 · 494 posts · 284 votes
How do returns with 4+ people partnering on a deal work?
Most Popular Reply
Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes
4yQuote from @Kyle Curtin:
Goooooood morning BP!
I am in the very early stages of jumping into the small commercial space in the near future from being in the 2-4 unit residential space, and am learning as much as I can at the moment! Please bare with my limited knowledge in the space haha!
So I have a quick question that has been pondering in my mind and I have not had a conversation with anyone about it yet.
Say you find a 6 unit (or more) property and have 4 partners that have equal splits (25%/piece) and put up the same amount of capital to purchase a deal. After analysis, you forecast a 12% (all hypothetical numbers) COC return post stabilization, how does that get divided across the four partners? I know there are different ways to structure deals with splits and etc. But very generally speaking, does each person get a 3% return a piece and then whatever equity % off the top of the deal that everyone decides if there is one?
Thank you so much!
Kyle
I am really not sure how to respond, except, equal distribution . Why would it be more complicated ?
Connect with someone doing deals, learn then apply what you learn,
29 Replies
- New to Real Estate · Worcester, MA · Member since 2021 · 63 posts · 48 votes4y
Good morning Kyle!
I should think returns would be subject to the operating agreement. In other words, whatever entity you choose (LLC, LLP, C-Corp) will have an operating agreement spelling out how pro-rata profits are distributed. Cheers!
- Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes4y
Quote from @Kyle Curtin:
Goooooood morning BP!
I am in the very early stages of jumping into the small commercial space in the near future from being in the 2-4 unit residential space, and am learning as much as I can at the moment! Please bare with my limited knowledge in the space haha!So I have a quick question that has been pondering in my mind and I have not had a conversation with anyone about it yet.
Say you find a 6 unit (or more) property and have 4 partners that have equal splits (25%/piece) and put up the same amount of capital to purchase a deal. After analysis, you forecast a 12% (all hypothetical numbers) COC return post stabilization, how does that get divided across the four partners? I know there are different ways to structure deals with splits and etc. But very generally speaking, does each person get a 3% return a piece and then whatever equity % off the top of the deal that everyone decides if there is one?
Thank you so much!
Kyle
I am really not sure how to respond, except, equal distribution . Why would it be more complicated ?
Connect with someone doing deals, learn then apply what you learn,
- 4yAndrew FreedBusiness MemberInvestor · Worcester, MA · Member since 2020 · 1k+ posts · 1k+ votes
@Kyle Curtin - When you have that many hands in the kitchen, I recommend subbing our property management and not relying on one member to manage the property. If they are collecting a property management fee and not performing to expectations, that could cause discontent among the group.
Regarding the profit, I would set it up as a straight split based on equity brought to the table. So if each person brings 25% each, the profit is split in quarters and distributed. If one person brings 50% and 2 people bring 25%, the profit is split accordingly. Does that make sense?
- Real Estate Agent · Tewksbury, MA · Member since 2020 · 494 posts · 284 votes4y
Quote from @Andrew Freed:
@Kyle Curtin - When you have that many hands in the kitchen, I recommend subbing our property management and not relying on one member to manage the property. If they are collecting a property management fee and not performing to expectations, that could cause discontent among the group.
Regarding the profit, I would set it up as a straight split based on equity brought to the table. So if each person brings 25% each, the profit is split in quarters and distributed. If one person brings 50% and 2 people bring 25%, the profit is split accordingly. Does that make sense?
Hey man :) Property management will 110% be implemented when I find a deal haha. It does make sense thank you! But the spot that is still a little unclear to me is the actual profit, say the asset is cashflowing 4k a month, that is divided to be $1k a month across the 4 equity partners with a 25% stake each which is great, but if you only have a 12% COC total in the project, does that make it only a 3% COC for each member and not really make sense in terms of returns on an individual investor level? It might be easier for me to describe in terms of a syndication haha. How are 50 people able to get 8% prefs when you only buy one share @50k/piece? It is just a little tough to wrap my brain around at the moment haha!
Unless, do GP’s also run numbers on an LP level with only a $50k buy in without debt/expenses and the cash on cash on their investment as individuals is actually much better? An 8% pref on 50k would be 4,000 annually.
I have lots to learn my friend haha, I am going to find some more resources to learn deal structuring and practice it!
- Real Estate Agent · Tewksbury, MA · Member since 2020 · 494 posts · 284 votes4y
Quote from @Bob S.:
Quote from @Kyle Curtin:
Goooooood morning BP!
I am in the very early stages of jumping into the small commercial space in the near future from being in the 2-4 unit residential space, and am learning as much as I can at the moment! Please bare with my limited knowledge in the space haha!So I have a quick question that has been pondering in my mind and I have not had a conversation with anyone about it yet.
Say you find a 6 unit (or more) property and have 4 partners that have equal splits (25%/piece) and put up the same amount of capital to purchase a deal. After analysis, you forecast a 12% (all hypothetical numbers) COC return post stabilization, how does that get divided across the four partners? I know there are different ways to structure deals with splits and etc. But very generally speaking, does each person get a 3% return a piece and then whatever equity % off the top of the deal that everyone decides if there is one?
Thank you so much!
Kyle
I am really not sure how to respond, except, equal distribution . Why would it be more complicated ?
Connect with someone doing deals, learn then apply what you learn,
Hi Bob! I am just trying to wrap my head around how the cash on cash would be for each limited partner in a deal on their investment if the total return for the project is 12% and how it is divided. I definitely have a few resources I will reach out to to keep learning! :)
- Real Estate Agent · Tewksbury, MA · Member since 2020 · 494 posts · 284 votes4y
Quote from @Matthew Bowling:
Good morning Kyle!
I should think returns would be subject to the operating agreement. In other words, whatever entity you choose (LLC, LLP, C-Corp) will have an operating agreement spelling out how pro-rata profits are distributed. Cheers!
Hey Matt! It has been a while since we talked a few days ago haha! Thank you sir! :)
- New to Real Estate · Worcester, MA · Member since 2021 · 63 posts · 48 votes4y
Quote from @Kyle Curtin:
Quote from @Matthew Bowling:
Good morning Kyle!
I should think returns would be subject to the operating agreement. In other words, whatever entity you choose (LLC, LLP, C-Corp) will have an operating agreement spelling out how pro-rata profits are distributed. Cheers!
Hey Matt! It has been a while since we talked a few days ago haha! Thank you sir! :)
Hope you're doing well! You have a new podcast follower on Spotify as of this morning 😀
- Real Estate Consultant · Cleveland · Member since 2020 · 6k+ posts · 3k+ votes4y
Quote from @Kyle Curtin:
Quote from @Bob S.:
Quote from @Kyle Curtin:
Goooooood morning BP!
I am in the very early stages of jumping into the small commercial space in the near future from being in the 2-4 unit residential space, and am learning as much as I can at the moment! Please bare with my limited knowledge in the space haha!So I have a quick question that has been pondering in my mind and I have not had a conversation with anyone about it yet.
Say you find a 6 unit (or more) property and have 4 partners that have equal splits (25%/piece) and put up the same amount of capital to purchase a deal. After analysis, you forecast a 12% (all hypothetical numbers) COC return post stabilization, how does that get divided across the four partners? I know there are different ways to structure deals with splits and etc. But very generally speaking, does each person get a 3% return a piece and then whatever equity % off the top of the deal that everyone decides if there is one?
Thank you so much!
Kyle
I am really not sure how to respond, except, equal distribution . Why would it be more complicated ?
Connect with someone doing deals, learn then apply what you learn,
Hi Bob! I am just trying to wrap my head around how the cash on cash would be for each limited partner in a deal on their investment if the total return for the project is 12% and how it is divided. I definitely have a few resources I will reach out to to keep learning! :)
you are making this much much more complicated, its an equal spit since each person contributed equally
Good Luck
- Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes4y
If you are doing a GP/LP structure (with a preferred return) - cashflow is distributed based on ownership stakes, then GP promote kicks in once preferred return is met.
If you are doing a GP/LP structure (without a preferred return) - GP promote is taken off the top of cashflow distribution, then LP ownership stake kicks in.
If you are doing a JV structure - everything is split based on ownership/capital contribution
If your goal is to syndicate real estate, you definitely want to become very knowledgeable in how splits/promotes/fees work for GP/LP structures. The underwriting is completely different than a standard deal.
- 4yAndrew FreedBusiness MemberInvestor · Worcester, MA · Member since 2020 · 1k+ posts · 1k+ votes
@Kyle Curtin - I think we are confused about the structure. Everyone is giving you recommendations based on a JV structure. I believe you are contemplating taking investors funds in a deal and promising a preferred return, which is structured differently. With preferred returns, the investors are paid first then the GP takes profits after the preferred returns are given.
- Beaverton, OR · Member since 2017 · 11 posts · 4 votes4y
Quote from @Kyle Curtin:
Quote from @Bob S.:
Quote from @Kyle Curtin:
Goooooood morning BP!
I am in the very early stages of jumping into the small commercial space in the near future from being in the 2-4 unit residential space, and am learning as much as I can at the moment! Please bare with my limited knowledge in the space haha!So I have a quick question that has been pondering in my mind and I have not had a conversation with anyone about it yet.
Say you find a 6 unit (or more) property and have 4 partners that have equal splits (25%/piece) and put up the same amount of capital to purchase a deal. After analysis, you forecast a 12% (all hypothetical numbers) COC return post stabilization, how does that get divided across the four partners? I know there are different ways to structure deals with splits and etc. But very generally speaking, does each person get a 3% return a piece and then whatever equity % off the top of the deal that everyone decides if there is one?
Thank you so much!
Kyle
I am really not sure how to respond, except, equal distribution . Why would it be more complicated ?
Connect with someone doing deals, learn then apply what you learn,
Hi Bob! I am just trying to wrap my head around how the cash on cash would be for each limited partner in a deal on their investment if the total return for the project is 12% and how it is divided. I definitely have a few resources I will reach out to to keep learning! :)
I don't know about partnership structures but if each person contributed an equal amount then they would all get a 12% return on their investment. You wouldn't split the 12% return 4 ways.
- Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes4y
@Kyle Curtin can you do this deal alone?
- Rental Property Investor · Member since 2018 · 826 posts · 809 votes4y
@Kyle Curtin I think the best thing to do is take paper and pen to sketch out the simple financials. Text responses can be misinterpreted.
Don’t worry about % at the moment because that is confusing your understanding. Just work with absolute numbers and it will be clear.
- Property Manager · Zanesville, OH · Member since 2018 · 37 posts · 27 votes4y
@Kyle Curtin if the overall deal is a 12% cash on cash return and you put up one fourth of the cash, your return is still 12%, not 3%. It's the same ratio or percentage whether you put up all of the cash or only part of the cash.
- 4yDaniel DietzPro MemberRental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
Quote from @Clinton McGilvray:
@Kyle Curtin if the overall deal is a 12% cash on cash return and you put up one fourth of the cash, your return is still 12%, not 3%. It's the same ratio or percentage whether you put up all of the cash or only part of the cash.
^^^^^^^^^
THIS RIGHT HERE
- Real Estate Agent · Tewksbury, MA · Member since 2020 · 494 posts · 284 votes4y
Quote from @Matthew Bowling:
Quote from @Kyle Curtin:
Quote from @Matthew Bowling:
Good morning Kyle!
I should think returns would be subject to the operating agreement. In other words, whatever entity you choose (LLC, LLP, C-Corp) will have an operating agreement spelling out how pro-rata profits are distributed. Cheers!
Hey Matt! It has been a while since we talked a few days ago haha! Thank you sir! :)
Hope you're doing well! You have a new podcast follower on Spotify as of this morning 😀
Thank you so much Matt! It means a lot! 😁
- Real Estate Agent · Tewksbury, MA · Member since 2020 · 494 posts · 284 votes4y
Quote from @Daniel Dietz:
Quote from @Clinton McGilvray:
@Kyle Curtin if the overall deal is a 12% cash on cash return and you put up one fourth of the cash, your return is still 12%, not 3%. It's the same ratio or percentage whether you put up all of the cash or only part of the cash.
^^^^^^^^^
THIS RIGHT HERE
Thank you haha! I understand much more clearly from everyone on this thread, I just had a little bit of a hard time understanding!
- Real Estate Agent · Tewksbury, MA · Member since 2020 · 494 posts · 284 votes4y
Quote from @Clinton McGilvray:
@Kyle Curtin if the overall deal is a 12% cash on cash return and you put up one fourth of the cash, your return is still 12%, not 3%. It's the same ratio or percentage whether you put up all of the cash or only part of the cash.
Hi Clinton! Thank you so much! It makes much more sense now! I am just beginning in this space and always wondered how bigger deals were structured and this thread gave much more clarity!
- Real Estate Agent · Tewksbury, MA · Member since 2020 · 494 posts · 284 votes4y
Quote from @Allan C.:
@Kyle Curtin I think the best thing to do is take paper and pen to sketch out the simple financials. Text responses can be misinterpreted.
Don’t worry about % at the moment because that is confusing your understanding. Just work with absolute numbers and it will be clear.
Hi Allan! I totally agree, it definitely makes more sense to be now, it just took a little bit for it to click haha! Thank you!
- Real Estate Agent · Tewksbury, MA · Member since 2020 · 494 posts · 284 votes4y
Quote from @Bud Gaffney:
@Kyle Curtin can you do this deal alone?
Hey Bud! I cannot do a deal like this alone, I definitely would need my business partner and likely 1 or two others to take one down like this!
- Real Estate Agent · Tewksbury, MA · Member since 2020 · 494 posts · 284 votes4y
Quote from @Kwame Essieh:
Quote from @Kyle Curtin:
Quote from @Bob S.:
Quote from @Kyle Curtin:
Goooooood morning BP!
I am in the very early stages of jumping into the small commercial space in the near future from being in the 2-4 unit residential space, and am learning as much as I can at the moment! Please bare with my limited knowledge in the space haha!So I have a quick question that has been pondering in my mind and I have not had a conversation with anyone about it yet.
Say you find a 6 unit (or more) property and have 4 partners that have equal splits (25%/piece) and put up the same amount of capital to purchase a deal. After analysis, you forecast a 12% (all hypothetical numbers) COC return post stabilization, how does that get divided across the four partners? I know there are different ways to structure deals with splits and etc. But very generally speaking, does each person get a 3% return a piece and then whatever equity % off the top of the deal that everyone decides if there is one?
Thank you so much!
Kyle
I am really not sure how to respond, except, equal distribution . Why would it be more complicated ?
Connect with someone doing deals, learn then apply what you learn,
Hi Bob! I am just trying to wrap my head around how the cash on cash would be for each limited partner in a deal on their investment if the total return for the project is 12% and how it is divided. I definitely have a few resources I will reach out to to keep learning! :)
I don't know about partnership structures but if each person contributed an equal amount then they would all get a 12% return on their investment. You wouldn't split the 12% return 4 ways.
Hi! Yup! It definitely makes more sense now! Thank you!
- Real Estate Agent · Tewksbury, MA · Member since 2020 · 494 posts · 284 votes4y
Quote from @Andrew Freed:
@Kyle Curtin - I think we are confused about the structure. Everyone is giving you recommendations based on a JV structure. I believe you are contemplating taking investors funds in a deal and promising a preferred return, which is structured differently. With preferred returns, the investors are paid first then the GP takes profits after the preferred returns are given.
Hey man, yeah it makes much more sense now :) just took a little bit to click!
- Real Estate Agent · Tewksbury, MA · Member since 2020 · 494 posts · 284 votes4y
Quote from @Brock Mogensen:
If you are doing a GP/LP structure (with a preferred return) - cashflow is distributed based on ownership stakes, then GP promote kicks in once preferred return is met.
If you are doing a GP/LP structure (without a preferred return) - GP promote is taken off the top of cashflow distribution, then LP ownership stake kicks in.
If you are doing a JV structure - everything is split based on ownership/capital contribution
If your goal is to syndicate real estate, you definitely want to become very knowledgeable in how splits/promotes/fees work for GP/LP structures. The underwriting is completely different than a standard deal.
Hi Brock! This is great, thank you so much!
- 4yDaniel DietzPro MemberRental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
Quote from @Kyle Curtin:
Quote from @Daniel Dietz:
Quote from @Clinton McGilvray:
@Kyle Curtin if the overall deal is a 12% cash on cash return and you put up one fourth of the cash, your return is still 12%, not 3%. It's the same ratio or percentage whether you put up all of the cash or only part of the cash.
^^^^^^^^^
THIS RIGHT HERE
Thank you haha! I understand much more clearly from everyone on this thread, I just had a little bit of a hard time understanding!
I am involved in 4 different Partnership/LLCs that hold real estate. I agree with whoever said that sometimes putting it on paper helps. I like to draw pie charts to hash things through.
If there are ever any questions I might be able to help with feel free to hit me up directly. - 3yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
To answer this more generally, the concept of "Two and Twenty" is really the framework that ends up being adopted by most businesses, management teams, private equity, venture capital, etc.
It works because it aligns interests between management and shareholders.
Here's how it might work:
Four individuals pool money to purchase a $1M property. Each contributes $250,000. Each owns 25% of the $1M property (let's assume no debt for this example).
One individual is named as the General Partner. This General Partner, in addition to their 25% equity stake, gets paid 2% of the assets under management per year ($20,000), and receives 20% of the PROFIT on the deal.
If $1M is invested, and $2M is returned, then the proceeds would look like this:
- The original $1M is returned to shareholders ($250,000 each)
- 20% of the $1M in profit ($200,000) goes to the General Partner
The remaining profit ($800,000) is distributed to shareholders ($200,000 each).
The General Partner can also be a shareholder, and if it was one of the four individuals, in this case would earn $200,000 on their $250,000 invested capital, plus $20,000 per year for managing the investment, plus 20% of the profit as an incentive for managing the asset.
"Two and Twenty" does not literaly have to be the split, and there are many nuances/tweaks to this structure that are commonly applied (such as preferred returns). But, the essence of this structure is a powerful and very common way to incentivize management and align their interests with shareholders. If the concept of "Two and Twenty" is new to you, you'd be wise to dive down the rabbit hole of this concept and hire legal counsel before setting up a structure with this kind of setup in place.
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