Can a partnership increase net profit?

Question

What are your thoughts on a partnership agreement for rehabbing / selling? More so I'm talking specifically about silent partners, who want to take a profit but not do any work.

How would you structure this agreement?

I've had someone who wants to take on a partnership with me on a 50/50 split, and wants to split costs 50/50 - but he is out of state, and would not control rehab. I would be in charge of locating, inspecting, closing, rehabbing, selling the property.

Not sure if this is the best arrangement on 1 deal. Could there be a benefit to scale?

Thanks in advance

Michael Lauther · Answer

Danny, There are many ways a partnership can and will increase your profit but this arrangement is not one of them.

If you increase your ability to do more deals and have an equitable distribution of responsibility than a 50-50 split would make sense. 
In this case however you are short changing yourself unless you are compensated for your work before you establish profit.

what constitutes profit in this case will make all the difference. The fact that you are on site in addition to managing the rehab is also a benefit that should be considered when determining profit.

I would consider the partnership as if your financial contribution is rewarded by success of the venture but your management of the venture is rewarded as expense prior to determining profit.

Bill Gulley · Answer

All good points of view, you could also get a set charge for your work and treat that as an expense if the profits are 50/50. You'd need to state up front what your labor would be before doing a deal. You need to be paid for your labor.....or you could simply hire it out and just take care of the deal itself.

Justin S. · Answer

I do Joint Ventures deals on a 50/50 split.  You need to be careful of the wording in your agreement.  Even though my JV partners do not do any leg work, they do have a say in which properties they will JV with me and also some decision power if the deal goes sour.  I would advise you talk with an attorney to draft you up an agreement.  Having an agreement where they have no say and are truly silent can get you in trouble.

A lot of investors operate this way just be sure to have a good agreement that spells out possible scenarios.

Jeff S. · Answer

Danny,

If your partner is assuming all the risk and you don't have the resources where risk could cost you, then it is IMO an even deal.

If you have the money to do this on your own and have a proven track record then you will probably not do it.

If you have a track record you should be able to finance the deal, assume a share of the risk and make bigger profits.

For someone to finance the deal with someone who is unable to get financing and has no track record, getting in on the profits seems logical to me. In other words, he has more to lose than you. For you, if without assets, it is a win win deal IMO.

If you first exhaust your own credit and resources, and you make a profit on the 50% split, then it is better than no deal at all. You are leveraging your talents w/o capital risks. At that point it is all about volume. 50% of 10 deals is better than 100% of 2 deals.

J Scott · Answer

Exactly.  Or if he wanted to split the costs 50/50, but then you get more than 50% of the profit, that might make sense also.

But, mathematically, his proposal earns you the same amount of money with twice as much work.

Danny Day · Answer

J  Scott same exact thing I was thinking. Coming in 50-50 financially does not make sense on my part. If he backed 100% finances and I did the rehab that would make more sense splitting profit 50-50

J Scott · Answer

Just to clarify:

1.  He wants to split all the costs 50/50
2.  He wants to split the profit 50/50
3.  He wants you to do all of the work

Under that arrangement, you'd be able to do twice as many projects which would require twice as much work on your part, but in the end, you'd make exactly as much as if you didn't have a partner.

The ONLY way this makes sense is if doing twice as many renovations decreases your risk because it gives you a larger sample.  But, that doesn't seem like a good reason to be doing twice as much work.

In other words, if I have the situation correct above, this is a HORRIBLE deal for you -- and a great deal for him if you have the ability to make decent returns.

Can a partnership increase net profit?

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