Fair deal?

Question

I am just starting out and I'm thinking of investing in a property with a friend's private money. I kind of pitched the idea to him to see what he would think. I proposed we split the down payment and closing costs 50/50 in exchange for a 50% stake each in the equity. Since I would be doing all the work and he would just be providing money, I suggested we split the cash flow 25/75.

Now I'm wondering if that sounds fair or if I'm being too greedy? I guess partners can decide whatever they want between themselves, but is there a such thing as "typical" here?

Jon Magnusson · Answer

I'm going to agree with Jay on this one.  Unless your friend wants to be an owner and buy you out once the property is set up and cash flowing, I'd use him as a private money lender.  Get the property cash flowing and some forced equity into it then refi and pay him off.  I'm sure you can find some info on BP about hard money lending and private equity.  Just make sure there's enough meat on the deal so after the refi you're still cash flowing.  If you make him money and you're honest, you can do it again and again.  Win/win.

Moshe H. · Answer

What about deciding when to sell the property? Can each partner force the other one to sell whenever they want? Or should there be an agreement about specific conditions under which one can force liquidation? @John P., Thomas S., any thoughts?

Thomas S. · Answer

Do 50/50 and make sure you have a lawyer draw up your business agreement/partnership. If you don't you will be sorry. Guaranteed.

Moshe H. · Answer

@Jay Dean, thanks! I will present that option to him as well.

Moshe H. · Answer

Yes, I definitely plan to put something in writing, preferably looked over by an attorney, and have it notarized. I'm more thinking about what kinds of agreements I should put in the writing.

John P. · Answer

@Moshe H. some type of WRITTEN agreement should be in place. I think usually a buy-sell agreement so that way if someone wants to sell they first have to offer it to the partner.

On your other question, yes, 58/42 - :)

Moshe H. · Answer

Thank you, @Nnabuenyi Anigbogu, for your input!

Nnabuenyi Anigbogu · Answer

You should definitely get more than 50% of the overall deal (whether its more cash flow or more equity). You are putting in the same amount of money as your partner AND you alone are handling all the hassles with maintaining and managing the property. I would not accept an even 50% split in this scenario.

Now if 50/50 is the only way that your partner would do this deal, then you have to weigh if its worth losing the deal because he/she would pull out. If i had no other way to do the deal i would probably go ahead with the 50/50 if the deal is good enough.

Moshe H. · Answer

@Greg S., thanks for your advice as well.

Fair deal?

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