How to split when one partner puts up all the credit and funding?

4 Replies

In 2007, a partner and I decided to try flipping a house for quick profit (It was worst timing ever!)

At the time, the purchase price = 290k, rehab = 10k, and then thinking we can flip the house for 340k.

The house was solely under my name as my partner doesn't want to have his name on it at the time, thinking this will be a quick flip. The property was financed with hard money and my HELOC from my primary residence and we split the rehab cost.

The market tanked during the rehab time frame as we couldn't sell the house at all and underestimated how bad the market condition was (early 2008). So we decided to rent the place out. At the time, we were luckily enough to get HELOC on the property itself and that was able pay off the hard money and most of my HELOC from my primary residence.

Fast forward 10 year, we are selling the place as the property had climbed back up to ~360k.

So what will be cost for managing the property for the last 10 years and also the credit that I had to use as the property was solely under my name.

Thanks in advance for all the feedbacks!

There should have been an operating agreement in place that defines profit splits, but if there isn't one, 50-50 is usually where most people would start. Since you put up the credit and HELOC money from your personal residence, it'd be fair if you had a higher split of the profits since you incurred more of the risk. Not sure what kind of relationship you have with this partner, but profit splits should have been ironed out well before any action was taken IMO.

@Andy Lu , You should always have a very clear agreement prior to the purchase. I am a strong believer that to make any partnership work it has to be equal beneficial to all parties involved. 

Each partner should receive back what they put into the property. Then the net should be divided between both partners. Rent payments covered mortgage so you would have to take in consideration any +/- moneys after monthly payments. 

If you managed the property for 10 years, normally there should be a 6% management fee per month. This would equal to around $14,400 over the duration of the partnership. It would be unfair because you are actually managing your own property that you have a 50% ownership. So you may want to minimize the percentage to 3%.

Based on your numbers. Your all in cost was $300K the resale is $360K this leaves $28,800 net after the closing cost. 

The problem with such a long term partnership without legal documents outlining the conditions, contributions and exit financials becomes a issue. Especially when it's business between friends. Over the years if one partner is doing more or feels they've put in a higher stake in the venture then stress or division can occur in the partnership. Unfortunately this develops into a right of entitlement over the other. Of course I do not know your position nor do I state that this is your scenario just some information for others whom may read this post.  

Hi Bob and Robert, thank you for your valuable feedbacks. I know it's hard without a clear agreement on the contingency plan if in the case that we could sell the property as a flip back in 2007. I am treating this strictly business and want to be fair as possible. How would you guys value the credit I had to use to finance the loan for the property? Initially it was a quick flip I thought my credit will only be tied up for few months but now this end up to be 10 years.

Originally posted by @Andy Lu :

Hi Bob and Robert, thank you for your valuable feedbacks. I know it's hard without a clear agreement on the contingency plan if in the case that we could sell the property as a flip back in 2007. I am treating this strictly business and want to be fair as possible. How would you guys value the credit I had to use to finance the loan for the property? Initially it was a quick flip I thought my credit will only be tied up for few months but now this end up to be 10 years.

Regarding the title of this thread, if the "one partner" was you, then it would seem that their $5k risked, as a proportion of your $295k risked at the beginning, can be the same proportion for the exit strategy too, right? 

[I reckon the rental income, and expenses paid all the while, should also have been allocated at that same proportion! If they weren't, adjustments may be justified]. My 2c. Welcome to BP...

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