How to structure a partnership for BRRRR investing
I'm an experience contractor and home inspector in Eureka, CA. But I don't have a pile of cash to get started. Assuming I can find an investor who wants to partner or invest with me, what would the particulars of that deal look like? How would I determine what is fair?
There are a few ways to do this. I just did a deal last year where I was in your shoes. I partnered with someone who paid for nearly all the renovation and the upfront cash. We bought the property with cash, about 70k from my partner, and 250k hard money. There were about 50k in reno costs. I did 95% of the work and we ended up splitting it 50/50, but we went through a few different scenarios.
1) My hourly contribution would be how I gain equity. This is the logical way of doing it, but it's tough to determine the hourly rate and the value of renovation expertise. This option also doesn't motivate the contractor (you and I) to get things done fast and with a hard money loan that's not a good combo.
2) Determined by the cashout refinance. Depending on how much cash we pulled out after refinancing that could be used to adjust equity amounts. This was just one more lever that could be used to try to make it more logically "fair".
Ultimately we went with 50/50 for a few reasons. One, the hourly contribution and financial contributions were close enough that it made sense. I ended up paying for some of the reno as well so that helped me because on paper I should have had less equity. The big reason was that both me and this partner wanted to do more deals together in the future and we didn't want to be nickel and diming each other forever. We realized that for a partnership to work out both of you need to be 110% invested in the project and it's much tougher to be fully invested when one has a much larger stake and essentially becomes "the boss"
Hope this helps.