Share of equity for managing the deal

Rehabbing & House Flipping
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Share of equity for managing the deal

Adam Vadnais
Cold Lake, AB · Member since 2019 · 12 posts · 14 votes

I am buying a house to fix and flip and I am taking on some partners to fund the deal. Most partners are happy with getting a set rate of return but one wants to have equity in the house instead as he believes it will be more profitable when we sell. His part is totally passive, he just provides some of the money.

To compensate myself for the work of finding the deal, managing the contractors etc I was thinking that I would set aside a share of the equity and then divide the rest based on our respective investment.

For example: if the equity set aside is 'X' and he is funding 25% of the deal, then:

(100%-X%)25% = his share of equity

Does this make sense?

And what is a reasonable mount of equity to set aside for managing the deal?

I was thinking 10%

Thanks everyone

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  • Greg Dickerson
    Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Adam Vadnais:

    I am buying a house to fix and flip and I am taking on some partners to fund the deal. Most partners are happy with getting a set rate of return but one wants to have equity in the house instead as he believes it will be more profitable when we sell. His part is totally passive, he just provides some of the money.

    To compensate myself for the work of finding the deal, managing the contractors etc I was thinking that I would set aside a share of the equity and then divide the rest based on our respective investment.

    For example: if the equity set aside is 'X' and he is funding 25% of the deal, then:

    (100%-X%)25% = his share of equity

    Does this make sense?

    And what is a reasonable mount of equity to set aside for managing the deal?

    I was thinking 10%

    Thanks everyone

    Adam - Typically if you find the deal and manage every aspect of it through the exit you would keep all of the profits and only pay for the cost of the capital to the private lenders.

    If you want to share profits with the investors instead of a preferred return that would typically be 50/50 split so you keep half and the investors would get a prorrata share based on the amount invested.

    If you are mixing the two you would split profits after the pref is paid base on the amount invested so if that’s 25% for investor you would keep the remaining 75%

    Whatever you decide to do make sure to hire a real estate attorney or SEC attorney to set this up for you as You will need an operating entity to manage the deal typically an LLC and you will want to hold title to the property in an LLC as well. If you have multiple investors that are totally passive you were going to need to file an exemption with the SEC as this would not be a joint venture unless they are active in the deal.

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  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    6y

    You can't do the deal without his cash. He can't do the deal without your boots on the ground.

    I would make it simple. Pay yourself an hourly wage for work done during the flip. Split the equity 50/50 after sale.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    6y

    If you break a deal down into 3 parts, you have finding the deal, managing the deal, and finding the deal. In today’s market, I would classify the finding of the deal as the biggest ratio of the 3 with finding the deal second and managing the deal last. In other words, the 3 portions of the deal are not equal. With that in mind, figure out what your cost would be to find the deal straight with debt. Then compare a few equity option percentages to your money partner. You can always provide a set return (pref return) and then a lower equity stake after as another option.

    Keep in mind it needs to be fair for both parties, if one side feels shorted, it was likely not a fair ratio. If the money partner is 100% passive and has zero say in the management of the deal,  it they want equity as a better protection for them, figure out a few other options other than equity to protect them. Perhaps put up other collateral (cross collateralization), offer personal guarantee (which is only worth something if you have other assets), etc.

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