Ideal split for a private equity deal

3 Replies

A colleague of mine and I are considering entering into an equity partnership. The strategy will be fix-and-hold single family homes. Colleague provides the cash, I provide the rest (deal analysis, negotiations, closing, repair planning and execution, management etc)

What I’m curious to get the opinion of BP on is what’s a reasonable way to structure the split of profits? I think including a preferred return into the operating agreement so as to cash out my colleague first if/when the property eventually sells seems good. We intend to hold these properties for at least 5 years, potentially 10-15. 

@Adam Yetter I would say if your partner is strictly passive he should receive between 50-75% of cash flow and equity.. You can ask for up to 50% if it's an amazing deal that requires a lot of time on your part to get the property to its potential.

We are working on similar deals to this right now. We have several investors who want in at a 50-50 split with them bringing the down payment of 20-25% and us doing ALL of the finding, aquisition, rehab management, placing tenants, and ongoing business management and PM. 

Our history of our exisiting 25 rentals shows that there should be enough cash flow and equity growth to offer then and us EACH an 8-15% return on the cash invested.

They would get their down payment back either; 1) as soon as their is enough equity growth (projections 5-7 years) to be able to cash then out 2) when there is enough equity for both of us to do a cash out refinance to both pay them back AND give each of us a ROE 3) or at eventual sale in 10-30 years. 

In our case, we have the track record in PM, finidng deals; above average business knowledge and skills. So we are doing our investors as "much as a favor" by giving them a great, safe, stable long term investment and they are by lending us the money to do the deals. A true "win-win" - always a good start to a business relationship!

Dan Dietz