What is a fair percantage in this partnership?

52 Replies

Hi Everyone!

I have an investor who has been investing with me for a long time and he now wants to partner. We have an amazing track record with the investment properties he purchased through me as an agent and we are good friends. He offered me to partner on a new project and I wanted to get an advice on what is a fair percentage for this partnership for each one of us.

The plan is to purchase multiple properties, few at a time, rehab,rent and refinance (BRRRR) and hold while buying more. My role will be finding the properties, handling the purchase process, rehab, management and also putting 10% of the purchase price and rehab cost. The rehab will increase the value of the properties by at least 20%. He will be putting 90% of the purchase price + 90% of rehab. All properties will be owned in an INC or LLC. I will not be getting paid RE commissions or management fees in order to minimize expenses and make the investment as profitable as possible. I'm interested in equity.

What do you think is a fair percentage for each of us based on what we offer?

From what I've heard there is no standard rate for the industry and it all depends on negotiation but I want to hear what you would do in my position!

Also, as we grow there won't be that much need for the money due to our growing portfolio, cash flow and increasing equity. How do I structure the deal based on this? The money will only be essential in the beginning.

I look forward hearing your opinions!

What are your partners responsibilities, 90% cash sure, but what else? Does he manage the rehab process start to finish, does he sign the loans or do you guys go all cash? 

What is the reason behind the 90/10 cash split. If the goal is to use the companies money in the future then why not just buy into the company 50/50 cash and then assign equity based on on going roles? 

I'm a fan of 50/50 partnerships with well defined responsibilities. I would think if you guys go 50/50 cash, you handle acquisitions and management and he handles rehabs, then 50/50 would be a decent split however I recommend partner on projects not a company. 

IMO it doesn't make sense to go 90/10 on cash unless you don't have the money right now in which case just partner on individual projects have a OA for each deal you do defining ownership and that way ownership can change per project. 

What if you guys want to buy a turn key deal that you find well under market value...well their is no rehab would it be fair for your partner to get 50% when you found the deal and have to manage it but there is no rehab...

Thank you for the advice @Reece Iovine ! The reason we are going 90%/10% with the cash is because he wants me to put some skin in the game. He will not be involved in the rehab, purchase or anything else. He will just bring 90% of the money I will do the work. 

I definitely agree with your point about properties which are not fitting our ideal model and I have been thinking about this. My idea was just to hold them under a different LLC or INC with different terms.

This is where it gets tricky in a way. If we go 50/50 on cash and I do all the work it will not be a fair split. On the other hand, if we do 90/10 on cash and I do all the work, 50% still seems too big of a cut. Therefore the fair percentage will have to be somewhere around the middle. Perhaps 33% for me and 66% for him? This values my work to 23% of equity in each project.

What do you think?

@Alberto Nikodimov

I’m curious as to others thoughts but am in the same boat. I’m a broker and flipper and people have started to approach me about partnering.

At a 50/50 split (which I think is fair)

Is it more or less profitable for YOU than if you borrowed hard money when all is said and done? That’s my personal litmus test, I suppose.

The measure of a good partnership agreement is not what happens when everything goes as planned but what happens when the proverbial sh*t hits the fan.  Your rehabs may increase in value 20%.  They may also decrease in value due to market conditions for a time period and that is when your partnership will be tested.

As a 90% cash contributor, I would no way agree to a 50/50 split.  I could hire a realtor at no cost to locate properties, and hire a project manager/GC to manage rehabs for me at far less total cost than 50% of the enterprise (unless the enterprise itself is pretty shaky and then giving away equity is like giving ice cubes to a resident of the North Pole).  However, your services will plainly have value and, accordingly, you deserve more than 10% of the equity in the deal if everything goes according to your initial playbook.  As the 90% contributor, I would be thinking in the range of 25%, with the possibility of going to 33% if you prove your value over time.  This is as much art as science but that's my 2 cents.        

Awesome! If it's only a slightly better deal to borrow hard $, it's obviously worth it to maintain the relationship with your client and it could help you leverage projects but I know how much work you are talking about on your end. Let me know what you decide/find! Also you'll have to create a partnership entity to take title on which sounds messy, I think. I Haven't done that yet. Unless you have a more like a note and it's in his name only...

Thank you for your input @Darius Ogloza . The main reason why I created this post is to see the perspective of an investor. If I was putting all the money I wouldn't want to give away equity but at the same time in his case he is willing to give away some equity in order to be less involved. He is also gaining someone who has proven himself and he trusts. I agree with your suggestion of 25% with potential of 33% if everything goes well.

We have also talked about a time in the future where I could invest more personal capital and use the gains of the company and obviously the equity will change then. How would you structure this from the beginning and set the terms in order to avoid future complications?

For specific contract level advice, it would be worth your while to consult an attorney licensed in your state, as there are a lot of moving parts here depending on what it is you and your investor actually envision.  A good transactional lawyer could run a few scenarios by you to ensure that your intent is fully captured in the agreement.  Just at a high level, what it sounds like is that you would like to preserve the right (but not have the duty) to increase your financial contribution in the future for a greater stake in the enterprise.  Would this right apply retroactively to past investments? Only to investments going forward?  Only to some transactions going forward but not to others?  As you can see, a lot of moving parts.

I am currently in the process of forming a partnership almost identical to what you are describing (except I would be the more passive investor in the partnership). What's so great about a successful BRRRR is that if everyone gets their initial money back (what you should be aiming for), then the profits are almost like a bonus. The way I see it, you need to figure out:
1) How to split cash flow
2) How to split equity in the house
3) How to split unexpected (and expected) costs

But I wouldn't get so hung up on the exact percentages. If it's a successful BRRRR then everyone's going to be likely happy. As the sweat equity partner - how are you going to protect your partner's investment? Perhaps promise that your partner gets all of the cash flow until his/her initial investment is returned before you get any cash flow.

You need to think of all the not-so-great scenarios and all the worst case scenarios and all the nightmare scenarios, from your partner's point of view. What happens if the project goes 2k over budget? What if it goes 30k over budget? What happens if you go MIA? What happens if you don't agree on choosing a tenant? What happens if you disagree on anything? Perhaps, consider one person (likely your partner) to always get the final say if you disagree on something. What happens if your partner thinks you're doing a terrible job? What happens if one person wants to sell? What happens if one person wants equity in the house for a HELOC?

This is the process I'm going through myself. Answer all these questions with your partner. It sucks to go 30k over budget, but if you agreed on something beforehand, I'd like to think that's much better than winging it and causing bitterness. Figure out these terms and then of course talk to an attorney to formalize the LLC, joint venture, or whatever legal entity you end up choosing. I'd probably also recommend talking to an experienced CPA (someone who know real estate) to learn about the tax consequences. How are you going to refinance the house is another good question to throw in there.

Hope this helps! Keep in mind, I am not speaking with past experience, but someone currently figuring it out as well. Feel free to DM me to stay in touch with your progress and journey. Cheers!

Thank you for taking the time to share your experience @Seth Hochberg ! I already messaged you. I definitely agree, everything should be in place beforehand in order to avoid future problems. I've seen it before. Me and my partner both think this is the right approach.

I hope we can help each other and share our experiences as we go! Thanks again for taking the time to provide all this useful information and personal point of view!

@Alberto Nikodimov

In “Real Estate Note Investing” by Dave Van Horn ( a Bigger Pockets publication), Dave mentions a story identical to yours.

To make the story short, he said don't do the partnership. If your friend wants to be involved, they can contribute capital as a lender & you can pay them points.

Dave is very clear (and I agree) money is worth points and nothing more. Do not give up equity on a deal you found and that you’re doing all of the work for.

Offer to use this money, pay them points, return the capital.

You keep the equity, they make high interest, everyone wins. And everything is fair.

@Alberto Nikodimov

Not sure of the actual percent, but i would not do 50/50. Someone should have final responsible so at least a 49/51. Who has the final say on deals? Partner with the money should have the majority stake. Obviously above 90/10 as you are doing the work, but below 50/50. You should also write up expectations and have an attorney go over. Finally, an exit clause should be included incase the partnership is less than desirable.

If you personally have the resources and experience to make the deal happen regardless of the money partner's contribution, then a deal where the money partner who contributes 90% of the total capital is limited to debt investor status is certainly possible.  If you do not have the resources and/or experience, then you are only guaranteeing that no deals happen.  

@Alberto Nikodimov

Your proposed split is similar to something I have:

Investor put up 100% of the purchase and rehab.

I found the deals, managed rehab, tenants, etc.

I am paid commissions, discounted 6% management fee, and have 10% equity.

How does that sound?

@Alberto Nikodimov

It is nice to go and check here for the advice, but he is “your good friend”. I will sit down with that person and outline the responsibilities of each partner and ask him what is a fair split. Having a successful partnership requires a good communication especially through things that uncomfortable to talk about it.

@Max T. All great info. Thank you for sharing.

I'm hoping to form a JV and take lead role as the deal finder, reno project Mgr, etc. We are planning to invest out of state which means that I would need to fly in to oversee/sign-off on certain aspects of the project. My question is, who pays for these travel/room expenses? Should these expenses be paid from the capital from my investors?

It is a hard question to answer as every partnership is different.  The risk/work/reward should balance out and all parties should be very happy.  If anyone feels they aren't receiving their fair share, it can get messy .

Thank you for sharing @Max T. ! For the right market this is a good way to partner up. I've seen it done with bigger multifamily units where it makes sense. However, I don't think it will work for us. The amount of work involved in this project is huge and it won't make sense on my side. My partner also mentioned he wants me to have a bigger stake in order to be 100% involved. The other problem I have seen in this kind of partnership is trust issues and small conflicts when it comes to management fees. I want to avoid that.

I agree with you @David Shakhunov . We will both be honest about it and have a conversation. I'm just doing my homework and making sure I'm doing the right thing. I wasn't sure what is a fair split, this is why I asked for help.

Hi @Joe Black , I have done it before and it's always charged to the company's card but make sure you are reasonable, keep track of everything and break down all expenses at the end of each trip. In few words, don't book 5 star hotels and party with the company's money! :D

I couldn't agree more @Ian Walsh ! I truly value my personal relationship with this person and I want to do everything in my power to avoid issues down the road. Of course, there will be some but I believe putting a plan in place and setting up rules from the beginning will help us control the problems along the way and avoid messy situations.