What is a fair partnetship profit split?

Question

Hi BP,

I'm new to structuring partnerships. If I'm hunting the off-market deal, negotiating it and locking it up, and my partner is bringing in the down payment and (possibly) rehab costs, what is a fair equity/cash flow split?

Joe Villeneuve · Answer

Sit down and list ALL of the items that must be paid for, both after your buy the property and before, leading up the deal...such as, market research, offers on properties you didn't get, etc...  Your list should be at least 20 items.

Now, place a number from 1 to 10, 10 being the most important (or the most work), for each item based on their relative importance to eachother.  Note, you can have more than 1 with the same number, and not all numbers (1 to 10) need be used,...but they can't all be the same.

Add up the numbers, and they shouldn't add up to 100...they could, but they don't have to and if you did it correctly, they most likely won't.  Divide 100 by this number.  This is what I refer to as your Factor of Importance (FOI).

Now, and only now, not before you assign number to each item, assign each item to each partner.  Then, add up these numbers (FOI) and you get what each partner gets for a percentage.  Simple, accurate, and since I came up with this method, I've NEVER had a complaint...because it's logical.

Joshuam R. · Answer

Uncle Joe at it again, excellent bravo! and good ending to the explanation lol

Account Closed · Answer

In my markets I look for properties that haven't been taken care of but have good bones in a decent neighborhood. Sort of the "worst house on the block". I'd go to some site like Rentometer.com and see what rents are going for in a neighborhood and then something like https://communitycrimemap.com/ to check out crime levels. Then I would settle on a couple of zip codes and prospect from there. I buy my properties "off market" but I use redfin.com to help determine my offer price.

I offer anywhere from 70% to 80% of what the house would sell for all fixed up. Since I believe prices are going to drop about 10% in the next 6 months, if a house would sell for $500,000 on the MLS fixed up today, I use $500,000 minus 10% (or $500,000 * .90 = $450,000) and assume a value of $450,000 in 6 months fixed up

and I offer 70% to 80% of $450,000 (or $315,000 to $360,000 offer) for a fixer. If you aren't profitable, it becomes a hobby not an investment, so make sure you are pricing to current conditions not what has happened in the past. If someone won't sell for what I'm willing to pay, I thank them for their time, leave my card and check back a month later and move on to the other properties. You may need to talk to a lot of owners before you find the right properties, but that's okay. You want a good long term property not something you bought and regret.

Joe Villeneuve · Answer

Uhhhhh.....NO.  Why?  You know there has never been a partnership where both partners put in the same value.  Usually one of the partners is financial (DP and REHAB), and the other does all the work.  What happens when the partner that put all the cash in gets all of that money returned to them from their share of the cash flow?  The other partner is still handling all the continuous work.

Darius Ogloza · Answer

It seems like you are starting at second base.  First off, how will title be held?  Who will be on the mortgage risk?  You? Your co-venturer? Both of you? How much money will be brought to the table by the other guy? Who will be responsible for securing additional funds if they are needed for repairs/mortgage payments?  How will dissolution work if things don't work out? Will you have the option to do a buy-out? A right of first refusal? Vice versa?  Lots of questions to be asked before you can reasonably decide on a split.

Greg Larson · Answer

Thanks Mike.  With the "(possibly) rehab costs" part I meant that those costs may be covered by the lender if we did hard money.

I'm primarily looking for properties to update and then hold and rent, not to flip and sell. Do you have any advice on that strategy given this market?

Johnny Lau · Answer

Keep it simple, 50-50

What is a fair partnetship profit split?

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