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).
I am trying to keep it SIMPLE, avoiding complicated calculations, loans, etc. We will be doing both Rentals, Fix&Flips, and BRRRR properties.
No replies yet - I've been thinking about this a little more...what would someone thinks of these ideas:
- 10% equity added - which seems to essentially be what a property management company might charge for their services.
- 1-2% additional equity percentages, as a "finders fee", to essentially mimic what an agent might receive in commissions if I were an "outside" investor.
There are an infinite amount of ways to set it up, but I have heard of a lot of people doing a 50/50 split when one person provides all the money and the other person does all the work. Sounds like he is doing all the work and providing a good portion of the money. if I were him and I was doing all the work I would want 50% even if you had twice as much money in the deal as me because he is providing all the expertise.
It is easier to find money than it is to recognize a good deal and have the skills to make it all work. Seems like he is providing you with a lot of value.
Josh, I like your answer and it has caused me to re-think my plan. What are your thoughts in terms of the risk I am taking on? In other words, if we do a 50/50 split on equity, and things turn south for whatever reason, I am taking on 100% of the financial risk. I'm not saying his effort wasn't wasted or isn't valuable, but I'm curious how you would value that. A few examples:
Example 1: A $150k BRRRR (My $100k, his $50k) - then I put in another $25k for CAPEX/Improvements, putting my share at about 71% to his 29%. We get an ARV of $200k - is this a deal you would consider worthy of a 50/50 split?
Example 2: A $100k investment, all me. Another $40k in rehab (all me), with a $200k ARV. He does all the work, arranges contracting, rehab, listings, renters, etc. Is this also worth 50/50?
Example 1 is easier for me to swallow. But for Example #2, in a market drop, some major event, and I find my $200k property worth closer to $100k, now I'm $40k in the hole. He still has a $50k "equity" - was the work he invested worth $50k in equity?
I'm purposely playing devil's advocate here, just want to do what is fair, and since I'm new to all of this, I'm looking to experts like you to help me think through it!
PS. He's going to inherit everything eventually anyway, ;-)
@Bruce Gardner - what did you end up doing? I'm looking to partner with my dad also. I would be 90% of the money, all the dealfinding and analyzing (I am out of state), he would be boots on the ground, GC for rehab, and some form of property manager.
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