Joint Venture % Split Question

6 Replies

I have a friend with quite a bit of idle cash. He always approaches me to find/partner with him on multifamily investments. My background is in SFR real estate investing. I have always been excited to enter into the large multifamily investment space. He would put up all the money and be considered a very passive investor. I would investigate and analyze the deal. On a percentage basis, how would you structure the joint venture. Could I justify a straight split(ie, 70/30) of all cash flow/profit upon exit?

70/30 split is a good split.

Since this is your friend just be open with them and make sure they are making a good return and make sure that you are paid for your time!

Thanks for your response Antoine. When you say make sure I am being paid for my time, do you mean in addition to the split?

I don't think that you've provided enough information to give you a more detailed answer. Some things to consider, just to get the conversation started:

1. Be more clear about what you're proposing. You say that you will find and analyze the deal, are you also going to operate it? Property manage yourself or find a property manager? Recommend an experienced sponsor? How big is the deal? Just add a little more clarity.

2. Assuming that you are talking about finding and running the deal yourself, you need to think about and discuss more than just saying a "70-30 split". A typical syndication deal has a lot more moving parts. Acquisition fees, asset management fees, preferred returns, dividend payouts, etc. For simplicity, just consider a few things. How often are you going to pay out dividends? Monthly, quarterly, annually, not until you sell? This makes a huge difference on calculating returns (IRR). Will you pay out a preferred return? A lot of syndication deals will pay out an 8% preferred return to the investor, before the sponsor gets anything. A typical split might then be 70-30 and then waterfall to 50-50 on returns over a certain %. I'm not saying that you have to be that complex but you need to be fair.

3. You have no experience buying or running a mf property. You are not putting any money into the deal. I personally would not invest with my best friend who has no mf experience...even if they have bought a few SFH deals and have been successful. I would have a hard time giving my friend with no experience and no $ in the deal cash even if he was giving me 100% of the returns. I'm conservative.

Alright, all of that being said, I think your split is too high. Just be realistic. Your friend can invest with an experienced mf syndicator with many deals under their belt and get the same returns that you're offering. Don't confuse what you want with what is best for your friend. I don't intend for that last sentence to be mean, I'm just trying to be realistic.

A straight 70/30 would be ok if you don't have other fees and no MF experience. A typical syndicator is getting 30% along with a 2% management fee and 2% acquisition fee. Typically, however, you would want to put some of your own money into the deal. 

@Brian Gerace

I think you're referring to a pure GV with your friend and not a syndication, so I'll concentrate on GV. First of all, there's no set percentage for those that put in capital versus the actual work. However as mentioned above, you don't have actual MFH experience, so think what exactly can you offer to your friend? Consider bringing in someone experienced with MFH into at least first deal. Also, in terms of the split, it is a matter of negotiating with your potential partner the breakdown and the responsibilities in a deal. You also should discuss various exit strategies and potentially consider getting into a deal as "partners in common" to get some flexibility for each other.

Good luck!

@Brian Gerace there are 4 parts of a deal to make a guideline on who gets what: 1) who is bringing the funding 2) who is doing the work 3) who found the deal 4) whos experience/network is being leveraged

A good starting point is evening weigh each of those 25% each but its very subjective and based on your personal relationship.

If you want to get my opinion on what is fair let me know.

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