Question about partnerships on flips, and a mini rant...

15 Replies

Hey all,

I have some questions about how you have structured partnerships on flips.  We have a friend who has the money to purchase the house.  We will fund the renovation through personal cash and renovation loans.  We (hubby and I) will do all the work.  Well, we will actually do a combination of work ourselves, and hiring contractors for the heavy jobs.  Friend is just a money partner.

What is a fair structure on this?  I don't think 50/50 is quite fair since we will be putting in similar money, but we will be doing the work.  We will all three own the house, so there is no risk for any one party on that front.

So now for my mini rant... before I posted this question I searched for other similar questions to see if it has already been answered.  What did I see over and over.... no real answers, but lots and lots of suggestions to seek a lawyer, be wary of partnerships, concern that friendships are broken up due to partnerships etc etc etc.  Lots of warnings, no answers.  To address this before the fact... yes we will see an attorney, a CPA, and have written partnership agreements and contracts before any house is actually purchased. 

So, anyone have an answer out there?  How would you structure this?  My thought so far are to offer straight up percentage on the money he puts in.  Alternatively, offer the friend a percentage of the final profits on the flip.

Our friend has already said he's interested and just need the details.  So what's fair in a deal like this?  Anything I'm not thinking of?

Because there is no answer.  It is what is agreed upon.  You say friend is just a money partner like that is not an important thing.  Is he going to be happy with just a percentage?  Its hard to say what is fair w/ any information (ie- how much is he putting in, who is going to be on the loan, how much repair work are you actually going to do- an what is the quality of it, how much money are you putting in, who is managing, what other responsibilities do each of you have).  Again, there is a lot of missing information- that is why there were so many posts about getting things in writing and warning of broken friendships previously.  It only makes sense to have all of this figure out Before you move forward.

I guess the question I have then is what have others done?  

@Edith TenBroek  

To answer your question, I know investors that just have a "money partner" do a 12% to 15% return on their money. 

As for partnerships, they are difficult. And if not handled properly, they can cause a rift whether its family, friend or acquaintance. So don't just rely on a handshake. Make sure you have a contract and have discussed exit strategies. Make sure every concerned is answered and expectations are understood. Also stay in contast communication with the money partner.

Also, I know @J Scott has covered this subject a few times, especially since he deals with monetary partners often. So I would go through his threads & I even recommend his books, if you haven't gotten them yet. They are a wealth of great information for this business.

I hope all of this helps. Good luck in your new adventure.

Nicole

Nicole Pettis, Novu Capital Investments | [email protected] | 614.638.8635

Edith,

I think a very important factor is how much each side is putting up. Saying that your partner is putting up the funds to purchase the home and that you are paying for (and performing) the renovations simply isn't enough information for us to offer proper guidance.


Examples:

Property cost 60k, Reno budget 40k. In this situation, since the monetary contribution is close but the amount of work isn't, maybe you deserve a 65/35 split or something along those lines.

Property cost 200k, Reno budget 30k. Big difference. In this situation, you'd be very lucky to find a partner willing to do a 50/50 split.

You mention offering a set percentage (say 15% return). I don't see that as a partnership. I see that as your friend being an investor and you are essentially financing the deal and have a debt cost of 15%. This is likely a better deal for you than a partnership, in reality, but most investors aren't willing to do this until you have a proven track record and they are sure their investment is in safe and capable hands.

I think the poster said they put similar money, but they do the works. If this the case, they deserve more than 50%

Yes, that's what I said! Each party will put in similar money (only estimates of course at this point) but we will be doing a lot of the work ourselves, and coordinating the reno.  

If the partner is willing to take a fixed return, like 15% mentioned above, that is the best scenario for you. But you asked for a "fair" structure and said this partner is a friend. If that is truly your goal, assign a fair payment for the man hours you and your husband put into it. After the property sells, subtract your "payment" for the labor and then split whatever is left 50/50.

If your friend is willing to just give a fixed interest loan, that's the simplest way to go.  I can't believe people are throwing around 15%.  That seems like a lot to me, but money is cheaper here in California, I guess.

If your friend wants a percentage of the profit, I would give him 50% of a portion of profits, based on how much cash he put in compared to the total cash that was required.  For example, let's say he puts in $50k and you put in $50k.  Let's say you profit $50k.  Because he put in half the money, he would get 50% of half the profit, in this case $12.5k.  If he had fronted all the money ($100k), he would get 50% of all the profit, or $25k.

I really don't think Robert G's suggestion above works in the general case.  Let's say you put in $90k and he put in $10k.  Is it really fair that he receives 50% of the profit after you pay yourselves for your work?

You said the money you are putting in is a combination of cash and rehab loans. Is the rehab loan secured by this property? If so, you are not putting in similar amounts (or taking similar risks) at all. You are basically offering your friend the opportunity to buy a house, which you will then use to secure rehab financing.

So if I am reading that right, he has a whole lot more skin in the game than you do.

You also don't mention what your experience level is. How many rehabs have you done? How many flips? How many complex projects have you run?

50/50 might be the best you can hope for. I personally wouldn't touch a project with inexperienced personal friends putting up little of their own money.

Read the book by Marty Boardman.  Two options are debt or equity partnerships.  Since you are new with this sounds like you should give up some equity.  Split the equity by % of the capital contribution in the deal.

Example...

Purchase $70K  (investor money)

Repairs  $30K (your money)

Total Project cost is $100K

Profit $15K (after all cost associated with holding and selling)

Split profit 70% investor... .70 X $15K = $10,500

Split profit 30% you... .30 x $15K = $4,500

Hope this help....

Frank

The easiest way is to treat the investment from your partner as debt and just pay a pre-determined amount of interest.  But, it sounds like you'd prefer more of an equity partnership instead.

While it's natural to want a simple answer when it comes to how to divide equity/profits within a partnership, rarely is the answer simple...

You need to sit down with your partner, make a VERY detailed list of everything that each party is bringing to the table, and then assign either an hourly, fixed or equity value to each thing.

For example, the list may look like:

YOU:

- Finding the deal

- Renovation costs ($50,000)

- Creating the scope of work

- 50 hours of contractor work you'll do yourself

- Finding and interviewing contractors

- Managing contractors

- Making design decisions and handling materials

- Accounting for the project

- Staging the house

- Finding the real estate agent to list/sell the house and managing the sales process

YOUR PARTNER:

- House costs ($50,000)

Now, instead of assigning an equity split for the whole project, it seems more reasonable to assign some hourly costs for some things (the contractor work you'll do yourself, for example), and it seems reasonable to assign a fixed cost for some things (the staging work, for example) and then assign equity for the rest.

So, for example, you may negotiate and come to the following agreement:

-  You'll get $25/hour for any contractor work you do

-  You'll get $1500 for finding the deal

-  You'll get $2000 to stage the house

-  You'll value the monetary contributions as 70% of the total equity -- if you're each putting in equal amounts of cash, you'll each get 35% of the equity for your contribution

-  You'll value the rest of the management work as 30% of the total equity -- if you're to do all the management work, you'll get 30% equity for your contribution

In the end, that would give you $25/hour for the contractor work you do, $1500 for finding the deal, $2000 for staging work and 65% equity.  Your partner would get 35% equity for her monetary contribution.

That's just one example of how you guys could negotiate it.  There are literally an infinite number of ways you could break up the tasks and then divvy up the pie -- you need to sit down and negotiate until you come to an agreement. 

Btw, it might take hours, days or weeks to agree on all the details.  If you can't handle having these types of type negotiations upfront, you should probably reconsider working with this person at all.

I had a good friend of mine invest with me on my first flip. He provided the cash for the 20% down payment on the house. I paid for everything else, found the house, did all the work, worked with contractors and my realtor, etc, etc. I came to him with the idea and the plan. I offered 25% COC return on the money he invested with me. All is good and we are set to close on 7/21 to the new owners!

Most of the answers thus far have focused on the reward side of the equation.  However, risk is a factor here as well.  If you strike an agreement with your partner that they get a fixed 15% return on their money, then you have taken most of the risk out of it for them.  If the reno goes bad, or the house won't sell and you have to drop the price, he still gets his 15% and you have to eat the loss.

I think 50/50 is fair in this case.  Yes, you are doing the work, but apparently you would not be able to do this without the partner, so without him the profit is zero.  I purchased my first multi with a partner.  He was the equity and I was the sweat.  The more I sweated the more equity I got.  I was thrilled to enter into this arrangement because without his money I would not have been able to do anything.  He garnered the majority of the financial reward from my work, but I made money and got great experience.

Don't get greedy.  People willing to entrust you with their money deserve to be compensated, especially when you don't have the ability to act without their money.

Medium logo flatWade Sikkink MBA, Sikkink Properties | [email protected] | http://www.rentmoney.biz

Thanks for the replies!  This is the type of discussion I was looking for!  I am leaning towards a 50/50 split because, as Wade said, we couldn't do this at all without his cash upfront.