I flip houses. What is a fair split if I do the work - general contractor and equity partner puts up all the money - $100,000 for house plus rehab. Upon sale we will have $40,000 net profit.
@Tina Wyatt what is fair depends on what you agree with to your partner. Since they are putting up all the money, could they find someone else to be a GC? Probably yes. If you are doing the work, could you find someone else to put up all the money? That would be much harder. So the person with the money has the leverage. What do they think is fair?
when I do these and I do a fair bit of them.. Its market specific.. If its mid west were deals are dime a dozen then I would be heavy towards the lender in regard to return.. If its West coast were deals are like Diamonds and tough as nails to find.. then the person that found the deal deserves more.
Start at 50/50 and work whats good either way.. Although those that control the funds should have the controlling interest 51/49 after all its their money and your brains.
so money partner puts up all the money and 50/50 split on the net profit sounds fair give or take a few % to the money partner if necessary? would the money partner also typically get interest on his money -- 6 months $100,000 at 10% so 5,000? Or would he just get 50 percent of the net profit and no interest on his money? I'm trying to figure out how this type of deal is typically structured. I realize there are a lot of different ways to do it so tell me what you would do. :) Thanks.
I agree with @Jay Hinrichs - joint ventures usually start around 50/50 then go the way of the lender. Typically the equity partner isn't going to charge interest as his cash is what gets him the 50-60% of the split. Of course, this is coming from a west coast investor. All my deals have been in Phoenix, Salt Lake, Vegas, Portland, and Seattle. Sounds a lot different in the Midwest. If you have everything set up and the deal is good - hard money shouldn't be that hard to get. Even paying an effective rate 20% you will make more if you keep all the profits after your costs.
JV deals are what you structure no certain way to do them. Its what you negotiate and what is fair for both sides.
However it is common to give a Pref return to the money.. Many PPM's that are out there today with commercial deals like apartments and other commercial ( large projects) will give a pref return to the money and then a back end profit split.. Alhtough they will also usually take a management fee as the promotor and or a commission up front on the buy side
On small single family home deals the ones I do are typically either 60/40 to me or 50/50 plus an interest rate on the money.
For me the split is not the main key, but the hold time. I have one flipper who gets more than 50% split from me because he is extraordinarily fast and turns the money quickly. The returns per deal are not spectacular but the yearly is.
I also do multi-family deals with 1 year hold times and get 70%+ split because of the longer hold.
Don't get hung up on the split for the first deal. I would think you want to do many deals so after the first one, you can sit down and look closely at the results and adjust from there.
My tips are to be transparent as the rehabber, don't skim, and give the money person peace of mind that he can get out of the deal if it sours. If you do that and give a good return, you will have a money partner for life and be able to do a lot more deals with less of your own money and less hassle than you could ever do using hard money.
I have done deals similar to what you have described in your original post. We split the profits 50/50. They put up all of the money for purchase, closing costs, rehab, and monthly expenses. I find the deal, facilitate the buying of the property, rehab and maintenance, and the sale of the property. When it is all said and done we split the profits 50/50 and the investor gets their money invested back.
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