Rental Property Investor · Houston, TX · Member since 2019 · 15 posts · 4 votes
I am starting a partnership with a contractor. He is completely reliable and I do not have any issues with him. I will be putting in the cash and he will only charge for the cost of material and labor, and completely exclude the profit he makes on his typical renovation jobs. Currently we are looking into BRRR deals and fix and flips. My question is how should we share the profit? what would be fair? let me explain with an example:
Purchase price: 200k
Rehab cost: 100k (with a non-partner contractor)
Charge by my contractor: 50k (only material and labor)
After Rehab sale price: 300k
Profit: 50k
My question is how should we share the 50k profit? 20%/80%? the problem is that I would 40k for my 200k investment, which is a good 25% return, but he makes 10k, while he would make 50k for a regular renovation job, so this deal would not be interesting to him.
I hope the situation is cleat, I would appreciate your insights.
Investor · Roseville, CA · Member since 2016 · 893 posts · 1k+ votes
5y
@Vahid Mostafavi Got it, now I understand better. I would give him the $100k then as his time is money as well, HOWEVER, for that amount I would expect him to sign some kind of covenant that reduces his equity at certain tiers if he does not complete the project within a certain time frame or hit certain agreed upon milestones.
Investor · Roseville, CA · Member since 2016 · 893 posts · 1k+ votes
5y
Are you not putting in $250k? I assume you are paying for construction costs right? So an 80/20 would make you 16% return (although you are not included closing costs, holding costs, etc yet so that is even smaller margin).
If this is your first time working together I might suggest you do 50/50 so you both do your best to 'shine' on the project and then figure out something more equitable on the next deal.
Rental Property Investor · Houston, TX · Member since 2019 · 15 posts · 4 votes
5y
Thanks @Jon Crosby, no I am not paying him anything, as he is essentially doing the job "for free" to get equity in the house. so my question is what should his equity be? only the 50k which is the material and labor cost or 100k which includes his profit on a regular rehab job, or something in between?
P.S. yes you are right I have excluded lots of additional costs to simplify the question.
Investor · Roseville, CA · Member since 2016 · 893 posts · 1k+ votes
5y
@Vahid Mostafavi Got it, now I understand better. I would give him the $100k then as his time is money as well, HOWEVER, for that amount I would expect him to sign some kind of covenant that reduces his equity at certain tiers if he does not complete the project within a certain time frame or hit certain agreed upon milestones.
New York City, NY · Member since 2016 · 5 posts · 3 votes
5y
Word of advice you should rethink that deal. Not because of your contractor but because a deal that requires that much investment, and yields 50k is not a deal. Your relationship with your contractor is good to keep it that way. Look for a better deal. Something like purchase 100k rehab 40k ARV 250K. After all, is said and done you will end with about 35k.
Rental Property Investor · Crestview, FL · Member since 2019 · 56 posts · 21 votes
5y
@Vahid Mostafavi
Have you decided on on how to structure your partnership and how to split profits? I’m looking to partner with a GC as well for my first flip. I’m finding and funding the purchase along with holding costs. Not sure how to do the split or just pay him as GC?