How to setup deals with partners?

Question

I need some help with structuring a partner deal.

Just for background, we've done around 10 real estate deals, but all with our own money/credit.

We found a potential deal, and we're at the point where we're our cash is tied up. So, we might need a money partner.

Three possible scenarios:
1) Partner provides cash (downpayment, fixup) and credit
2) Partner provides cash, we provide credit
3) We split cash requirements 50/50, we provide credit

What's the most fair way to split the profits in these scenarios?

Should we setup a new LLC with the partner (LLC formation cheap in our state)? Or do we writeup a JV agreement? Should we really have a lawyer do this?

Or is there a better way to do this?

Thanks in advance for your help and suggestions!

Account Closed · Answer

Fair? Hard to say.

I tend to design deals so that they solve the problem and have all the investors facing the same direction. By that I mean all the investors should have the same motivation and the same incentives. Maybe the splits are not equal but there should not be situations where 'partners' are more equal.

Now, if you want control and are willing to pay the other person to have a more passive role then fine. The deal will not be equal as there are different incentives. In those cases it can make sense for the partner to be a secured lender and not a partner with a say on all the decisions.

When trying to see what is fair in terms of what each person makes consider the alternatives. If you could borrow from a bank or you have more than one investor who would put in money then base what you pay based on what is competitive. Do not over pay when you have a lower cost alternative (relatively speaking as the alternatives are never exactly the same).

Run the numbers like you have done before when using your cash and credit. Run the numbers for bringing in a partner who shares the risks and shares the rewards. Work up alternatives in between.

When dealing with new investors (investors who have not worked with your before) keep it very simple. Assume that you will pay them even if you make no money. Do not put that in an agreement but operate that way.

John Corey