What's an appropriate sweat equity share?

5 Replies

Need some advice on partnerships. 

So I've had some success in SFD re investing (2 million portfolio). Now I've got family and peers that want in on the game, but want me to do all the work. Find the deal, close, manage, etc etc. Everything. 

How much equity share is a reasonable amount in sweat equity if I have a silent partner? How is that typically structured?  Can you give me some examples?

Example 1: Say we buy a 500k house, 100k down payment. How much can I ask them to put down if we are going to maintain a 50/50 ownership structure? 70/30? 60/40?  Or What if they are putting up 100% of the financing. What sweat equity is appropriate? 10%?

Example 2: I've thought about doing a large sweat equity share on the back end, or exit. So, we do a 70/30 split on down payment, and we maintain a 70/30 split on cash flow. But once the investor has been made whole (got his 70k back), then it shifts to a 50/50 profit slip. I realize that's probably not till we sell the place, but you get the idea. Would that be reasonable or attractive for an investor? I'm totally self funded so far so not sure whats appropriate.

your thinking to low If you do a 100% of the work you should get 50% of the deal without any capital 

I'm interested in well-thought out responses as well. Seems to me that accepting less than 50-50 cash flow is a bad idea even if it's only for a little while.

Another way to sell it to them is that you put down the Earnest money and they put down the rest. If they don't like that, you offer to pay for inspections and closing fees. So you accept all the risk upfront, and they have zero risk in going under contract. They get an appraised, inspected, thoroughly evaluated deal presented to them before accepting any risk. What do they have to lose? 

Ultimately they are probably looking for a lazy way to diversify their worth because they're afraid of the high stock market prices. You're doing 100% of the work to provide them a reasonable place to put it.

@Steven Picker So just to be clear, as an investor, you're saying that you'd be interested in putting down 100k (20%) for a 500k property that I brought to you that's a good deal, and would be ok with me owning 50%?  So you essentially bought 250k in equity for 100k. That seems pretty steep to me. What happens if we sell the property in 3 years and only make 100k profit? With a 50/50 split you'd basically break even.

If you were flipping properties and and after the investors equity was returned ( even with a prefered rate) 50% would be fine 

"So I've had some success in SFD re investing (2 million portfolio). Now I've got family and peers that want in on the game, but want me to do all the work. Find the deal, close, manage, etc etc. Everything." 

Personally I would give them between five and 7% return on their money after all they’re doing is loaning

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