I'm sorry if this is in the wrong forum, but I'm brand new here!
I'm trying to figure out a fair way to split deals with my son. I'm a brand new RE investor (haven't even done my first deal yet!), and planning on partnering with my son. He's the brains, lead generator, agent, and property manager of the operation (I trust him completely, he's a rock star), I'm basically providing the money. In essence, he's helping me get started in the business by doing the legwork and finding opportunities, etc. He'd prefer equity in the deals instead of flat out payments or a loan, but I don't know what is fair. Some specific examples:
- If our first deal is a 60/40 deal (my $60k, his $40k)...1) Is his work worth 10% to make it a 50/50 split?
- What about future expenses, e.g., if I have to put in another $5000 to upgrade something (now it's my $65k and his $40k), does that change things?
- If it's a major flip, let's say another of my $50k is added, making the split my $115k and his original $40k, or 75/25 - makes me feel like the original 50/50 is not as fair as what it was when we started.
Is a flat "+10%" fair - so at 60/40, it changes to 50/50. But at 75/25, it changes to 65/35, accounting for my extra money, but also his bonus percentage. Is 5% better, 15%? I came up with that range of percentages based on what an actual loan would be (conventional all the way to hard money), or the fact that it seems the going rate for property management is about 10%?
I am trying to keep it SIMPLE, avoiding complicated calculations, loans, etc. We will be doing both Rentals, Fix&Flips, and BRRRR properties.
Generally in partnerships, you would split any capital improvements just like you would split any cash flow or sales proceeds. Another method, although this is more complicated (and I've only seen it with securities, so you might want to talk to an attorney) is dilution; namely if one partner puts in more money afterward in CAPEX, the other partner's ownership is reduced. This should all be spelled out in your partnership agreement though. If you already have the partnership set up, you should probably go back to the table and hash out details such as these.
Andrew, thanks for your reply! I was already thinking about the dilution part. However, my dilemma is that I am virtually doing almost nothing other than "investing". If I were working with an agent/broker, there would just be commissions/fees, and I would retain 100% ownership in the property. Of course there would be property management afterward, but those would just be paid via cash. In this case, my son is doing much/all of that (and acting as an agent). So I'm torn between three different scenarios:
Scenario 1) I'm the investor, he's the agent - he gets paid for his work, as it's done. I might be interested in this scenario EVENTUALLY, but right now as I am new and get started, I need his help. So....
Scenario 2) We're partners - I provide a bulk/all of the financial input, he provides a bulk/all of the "sweat equity", we split ownership - how do we figure out ownership percentages?
Scenario 3) I'm providing him the money as if it's a "loan", so he would retain 100% of the ownership, and would just pay back his loan to me + interest. I'm not interested in this scenario.
So my original question was really about scenario #2 - how should we split things up? His work, effort, and expertise is worth a lot. But I am also taking on a bulk/all of the risk financially.
I have done deals with my dad in a similar situation to yours (although I am not claiming to be a rockstar).
What we did is have him loan the cash to our company and recieve interest on his cash before we split up equity and cashflows. So in your example. Your son puts in 40k and you match that plus some more. The extra above the 40k that you put in we would pay my dad 6% interest only until his principle was returned or indefinitely depending on deal and then divide up the rest 50/50. On a couple deals we split equity differently like if I was doing more work than normal or if he was putting up a significantly larger chunk of cash I might get 30% and him 70% but no interest for him. Basically we just try to make a fair deal each time we do a new deal we write out the terms we both agree and then we follow them. Investing with my dad has allowed me and him both opportunities that we otherwise would not have had.
Hope that was relatively clear if not feel free to message me and we can talk about it more specifically.
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