Looking for Advice on Structuring a Fair Real Estate Partnership

[Austin Alvarado]

Hey everyone,

 I’m putting together a real estate partnership and would really appreciate some input on how to structure it fairly.

Here’s the situation:

• We’re looking at purchasing a duplex that I will be claiming as a primary residence and moving into.
• Both myself and my business partner would be contributing 50% of the down payment.
• My partner would be strictly a passive investor — no involvement in sourcing, remodeling, or managing the property.
• I’m the active partner — I found the deal, will be handling the entire remodel after closing, and will also take on full responsibility for managing the property: tenants, maintenance, bookkeeping, etc.
• My Partnership Idea:

• Ownership Split: 60% to me (active partner), 40% to the investor
• Management Fee: I would receive a 10% fee on gross rental income for handling all ongoing property management responsibilities
• Both of us would split the down payment 50/50

I believe this structure is fair since I’m putting in both capital and all the time, labor, and risk especially with the remodel up front.

Do you think this is a fair and clean way to structure the deal? Has anyone done something similar, and are there any pitfalls I should be aware. (I also will be the GC on an ADU addition after a my 12 months is up living in the property.)

[Dan H.]

Depending on the value of the duplex,10% ownership seems high for managing a rehab.  Normal GC varies from 20% to 25% of the rehab in my market but that is for a professional with their various contacts.   Even large successful syndicators charge far less than 10% of total asset value as acquisition fee. They also charge an asset management fee which is your management fee.

The 10% of asset value likely comes down how great the purchase was. For a common MLS purchase, it is far too high. Was this listed on the mls? I Think for a killer off market purchase10%may be justified anything from the ml and t is way too high (look at syndication offers acquisition fees for a reference).

I assume you will be paying market rent.

As for PM fees, in my high cost market all inclusive (meaning including tenant turn over, re-lease, inspections, etc) PM (meaning licensed, insured and associated with a brokers license - in my market these are required to be a PM and handle money (but as owner you can handle the money)) fees are typically 6% to 8%.  LTR co-manager (meaning at least one of not licensed, not insured, or not associated with a broker license) typically isn’t more than 5%. 

Then recognize that you are the occupant of one unit out of two units.   This would greatly reduce the PM effort as you are dealing with one tenant.   I would use 60% effort of managing 2 tenants.  60% of 5% is 3%.  That would be fair co-manager in my market in the situation described.

Find out what is charged for an unlicensed manager in your market (our fees are low because our rents are high and tenants are easy to deal with).   Then take the reduction for occupying one unit (use somewhere near 60% of the total usual co-management fee).  That is the appropriate charge.

Good luck