Structuring a partnership with equal capital but unequal labor?

2 Replies

Hi BP community,

New investor looking for some help creatively structuring a partnership. I'm looking at making a purchase with a long time friend. We'd each contribute equal capital into the partnership, but our competitive advantage is that he'll live near our properties, is an extremely skilled contractor, and can thus manage and repair/improve our properties more affordably. I'll be in charge of all of the cash management and other administrative matters related to our partnership; this will obviously require less ongoing time than his commitment.

We're trying to think through how to fairly structure a partnership that reflects that he'll be committing more time to maintain our partnership than I will. So far a few possibilities come to mind, but I'm curious if y'all think I'm missing anything. My objective is for both parties to be treated fairly so that we can grow our partnership with mutual benefit for years to come.

Option 1: the 50/50 split
We can just decide to ignore the differential in hours required by each of us to keep up our properties and can split all returns down the middle

Option 2: billing the partnership for his labor
We can determine a reasonable market rate for his labor beyond a certain number of hours per month, and can bill the partnership for his time. This way we're effectively each covering 50% of the cost of his time

Option 3: the uneven split
We can figure out another split of ownership that makes sense for both of us to be happy despite the fact that we'll contribute equal capital to our deals. I'm not sure of a reasonable way to land on a number here

Curious if any of you think I can think more outside the box?

Is his ( contractor) equal share his labor??

Is the contractor putting up 50% for down and product and doing his labor for what?

His labor is big and should be considered at $50 an hour min.

2 months is 320 hours of labor at $50 is $16,000.

My thoughts!

His request is that we put an hourly rate on his labor and track his expenditure. Then we increase his equity in the house relative to mine through some reconciliation tied to his labor expenditure.

I would rather track his labor and pay him a fair hourly rate out of the partnership (so this way we're each effectively covering half of the cost of his labor).

But I'm not sure if there's an alternative I'm missing.  I'm just worried about allowing him to accumulate equity because it feels like some unforeseen circumstances could require material amounts of labor that would substantially (and unpredictably) change my return on investment if I'm losing equity the more work he puts in.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you