How to split up this scenario between investors/partners?

Question

In my rehab flip business I find/make the deal, I make the decisions and help on the whole rehab project, I close the deal..

My friends/partners want to invest with me and they will be taking a share of the profits depending on how much money they put in.

example: purchase price=420k   rehab,closing,etc=60k   sold=570   (90k profit)

Im the brains and keep up with the whole deal as stated above and I put in 80k on the project

one partner put in 200k

the other put in 200k

How will the profits be split fairly? Or what is a good formula for this? Thank you!

Brian Burke · Answer

@Omar Ghanim, treat the “work” and the “money” separately. Let’s say that you are doing all of the work and investing half of the required cash.  Then let’s say that you are splitting the profits 50/50, half for doing the work and half for bringing the money.  You would get 50% for doing the work plus half of the other half for bringing in money. The remainder would go to the other money partner(s) pro-rata.

So in your example of $480K split $200/$200/$80, which is 41.66%/41.66%/16.66%, the profit would split 20.83%/20.83%/58.33%.

Be aware that this arrangement is most likely a transaction involving the sale of a security, so you should seek legal counsel to assist to ensure that you follow the relevant securities laws.

Aaron Mazzrillo · Answer

This is an easy one. You tell your greedy friends that knowledge gets profits, money gets interest. You pay them a flat rate of 8-10% interest only. Otherwise, call up one of a dozen hard money lenders, Anchor Loans is a good example (I am not affiliated with them in any way shape or form) and borrow money from them at 8-10%.

Omar Ghanim · Answer

Thanks Brian, exactly what i had in mind just had to hear it from someone else. Will be going to an attorney tomorrow.

Aaron that makes sense i would just like to help them and having the cash right away makes deals easier for me.