Partnership split help

Rental Property Investor · NJ · Member since 2023 · 25 posts · 21 votes

Hi all,

I am looking to partner with a friend of mine to purchase some rental properties. I will be funding the deals and he will be finding the properties, diligencing, and then managing the properties. What does the partnership split usually look like in these situations?

Thanks!

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Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

@Steven Catudal

i don't understand the value that he is bringing... those are all just items you can pay a professional for. so what's the "partnership"?

i have people in my network who find deals; they get paid if I buy them; i diligence them; and then my PMs manage them.

i didn't look at your profile, but do you already own rentals? how much experience do you have?

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Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
1y
@Steven Catudal, In my opinion 100% you and 0% partner.
What do you do as time goes on and things evolve. Maybe the partner is less able to do some of the leg work or their priorities change or maybe they move out of state!
In my opinion it would be cleaner to split partnership based on monetary contribution and then remunerate each active party for their work if the active work is more on one partner than the other.
Have the partner make a nominal contribution on the first deal maybe 10% to your 90% and split the deal that way. Then pay them a fee for finding the deal and pay them 8-10% of rents to manage the rental(s).
This way the partner is getting paid more precisely for what they contribute. If the partner moves out of state next year they are still a 10% owner, but you simply hire another property manager for that same 8-10%.
If the partner wants to get a bigger cut on future deals, they can save their money and buy into a larger percentage on the next deal.
I'm sure you'll get differing opinions but this sounds more clean and simple to me.
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Steven Catudal
OP
Rental Property Investor · NJ · Member since 2023 · 25 posts · 21 votes
1y
Quote from @Steven Catudal:

Hi all,
I am looking to partner with a friend of mine to purchase some rental properties. I will be funding the deals and he will be finding the properties, diligencing, and then managing the properties. What does the partnership split usually look like in these situations?

Thanks!

One thing to clarify. He would not be managing the property himself but hiring a property manager to do that part.
Pretty much, I would be funding a large part of the deals and he would be doing all the leg work, getting it set up, and then managing anything that comes up.
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Adam BartomeoBusiness Member
Real Estate Broker · Cape Coral, FL · Member since 2015 · 2k+ posts · 1k+ votes
1y
I have always done a 50/50 partnership in these scenarios. I am the boots on the ground and provide all of the time and my partners supply the money. It is a great deal for the silent investor as they typically make 50% - 100% COC in less than a year.
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Preston DeanBusiness Member
Realtor · Fort Worth, TX · Member since 2021 · 779 posts · 368 votes
1y
Hi @Steven Catudal
There are a few different ways you can structure your partnership. Here are a few I have heard of
1. Equity split - This is more of a straightforward partnership where profits are divided based on the initial capital invested. Meaning if one partner initially contributes 60% & the other contributes 40% then that would naturally give you a 60/40 split
2. Time Commitment - Basically if one of you spend more time on the project than the other they should be compensated for that time. The split obviously can be up to you guys
3. Promote Structure - This is usually if you guys have 1 person who handles the majority of the business and the day-to-day operations. Obviously this person would naturally have more %
Regardless of what structure you guys decide on make sure it is clearly defined! Even if yall are friends just lay everything out on paper where its clear.
Cheers from Fort Worth!
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Aristotle Kumpis
Specialist · Long Beach, CA · Member since 2011 · 888 posts · 401 votes
1y
I would highly recommend you create an LP agreement. And the split is whatever you decide on. 50/50 is what a lot of people usually do.
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Nicholas L.Pro Member
Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
1y
@Steven Catudal
i don't understand the value that he is bringing... those are all just items you can pay a professional for. so what's the "partnership"?
i have people in my network who find deals; they get paid if I buy them; i diligence them; and then my PMs manage them.
i didn't look at your profile, but do you already own rentals? how much experience do you have?
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Joe S.Pro Member
Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
1y
Quote from @Steven Catudal:

Hi all,
I am looking to partner with a friend of mine to purchase some rental properties. I will be funding the deals and he will be finding the properties, diligencing, and then managing the properties. What does the partnership split usually look like in these situations?

Thanks!

Is he’s managing the property, give him a Property Management fee. If he finds the property, give him a finders fee.
I don’t know how skilled etc. he is so I am answering off of first glance.

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Steven Catudal
OP
Rental Property Investor · NJ · Member since 2023 · 25 posts · 21 votes
1y
Quote from @Nicholas L.:

@Steven Catudal
i don't understand the value that he is bringing... those are all just items you can pay a professional for. so what's the "partnership"?
i have people in my network who find deals; they get paid if I buy them; i diligence them; and then my PMs manage them.
i didn't look at your profile, but do you already own rentals? how much experience do you have?

Hi Nicholas,
I currently only own one property here in New Jersey so do not have that much experience. I would say that the value he brings is finding the deals, doing an initial diligence, having a local team set up for renovations/repairs/property management as well as knowledge of the neighborhood.
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Nicholas L.Pro Member
Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
1y
@Steven Catudal
yep i'm not saying there isn't value there - there definitely is. i'm just saying - that doesn't rise to the level of meriting "partnership." if he performs a service for you, just pay him for it. i work with agents, PMs, deal finders, lender, etc. all the time. I just don't "partner" with them. they perform a service and are compensated.
not trying to be critical, just trying to protect you as you get started.
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Earl WhitePro Member
Attorney · Rutherford, NJ · Member since 2020 · 60 posts · 37 votes
1y
@Steven Catudal

If your partner's main role is finding deals on the MLS or manage tenants, obviously a real estate agent does this and is paid commission. A formal business built on this seems overkill as you're essentially paying someone for a service that already has standard model.

If you and the parnter have distinct business tasks/abilities (i.e. not what you would hire an agent or contractor for), such as off-market lead generation, that’s a different discussion. Perhaps if your partner was a general contractor or handyman type there may be some merit there to reduce costs / increase profitability.

If your partner enjoys deal sourcing, a better move might be for him to become an agent - so he could legally collect commissions from finding deals and managing properties for multiple people. Also be cautious for you partner certain activities do require a real estate license. If you make the person an LLC employee you can get around it, but partner does need to be careful. “No person shall engage either directly or indirectly in the business of a real estate broker, broker-salesperson, or salesperson without being licensed.” (N.J.S.A. 45:15-1).

Also, the whole point of hiring a PM is to handle tenant, maintenance, and rent collection, so if your partner isn’t actively managing but just supervising the PM, IMO not worth having a two people essentially looking over the same tasks.

Contributing financially for one person and the other having no financial stake raises decision making questions, such as when to sell, how profits will be distributed, etc. You could create an operating agreement granting one of you the powers - but it is a fair amount of energy/time/activity for someone to manage and find deals.
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Jonathan KlemmBusiness Member
Moderator
Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes
1y
Hey @Steven Catudal - Maybe provide just a little more context around the partnership. Are you both friends and have unique skill sets and are breaking up the duties of investing based on those skills?
Ideally, you layout all the duties (Find, Underwrite, fund, rehab, manage) and assign a value to each of those based on how much time they might take. Some items might hold more weight than others, but you guys should sort through that together.
You also might just do the partnership deal by deal - sometimes jumping into a partnership before you have officially worked together is NOT the best idea...
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