How to split this real estate deal?

Question

Hi all! First time posting on bigger pockets but have followed the podcasts for a long time and always come here to learn.

Myself and a partner are interested in purchasing a value-add apartment building(8-14 units). neither of us has experience in multi-family but I have owned single-family homes and have a business and construction background. In this deal, I will be doing the Renos on one unit myself and then will be hiring and managing a contractor to do the other units. All capital contributions will be split equally; downpayment, lender fee, construction costs etc....

All that said I don't think it's fair to split the profit 50-50. I am able to fully fund and qualify for lending myself but because this is my first multi-family I don't want to take on the full risk. A couple of things I have considered is a finders fee of 1% and a sponsor fee on cash flows and on the sale/refinance of 25%. So if we make 100k I take the first 25k and the rest is split 50-50.

Would love to get any feedback or suggestions on this type of deal. This deal is in Canada and will be done through a corporation.

Thanks! Kurt

Zorya Belanger · Answer

Hi @Kurt Vongrad

I'm looking to do a similar project, though I don't have the construction background, and would be hiring out that part. I've spent a lot of time learning about multifamily and partnerships. First of all, the best split is whatever everyone feels is fair. There are so many ways to do it, but it does help to know what people are generally doing out there. I like starting with a typical pie-chart for smaller multifamily, where the capital is worth about 50% of the deal, financing/loan-guarantor is about 20% of deal, and time/management/expertise (the working partner) has about 30%. You start there and change percentages/fees to what is fair for your project. So if both partners are putting in capital, then each gets half of the 50% capital portion. If the project involves more work, you may want to negotiate more than 30% for the time you are putting in. Most capital investors would rather you not have any fees, especially for your first MF.  They see it as you getting paid first no matter what, but their profit depends on the outcome of project. Once you're more experienced, you could look at adding fees for future projects.

Matthew Beans · Answer

Definitely have a lawyer agreement/contract drafted.

Melanie Dupuis · Answer

@Kurt Vongrad I see two options here:-Buy it yourself! If the deal is good enough to buy, it should be good enough to buy alone. Partnerships can be a hassle and most times end up in disagreement, unfortunately.-If you do buy together, have the conversation now about your specific "fee" for what you are doing over and above. Have the lawyer draft up an agreemtn that you both sign, do not let it be a handshake. This might sound over the top, however if things go sideways, a handshake will not hold water.