We structure our syndications (after a bit of other steps such as preferred return/return of equity) with a 20% promote to the GP (which sounds similar to the role you're taking on), and then 80% to the LP (which will include your equity contribution).
In a simplified way, this plays out as follows -
$100,000 profit, with an 80/20 split, and the GP putting in 10% of the equity
GP = $20,000 + 10%($80,000) = $28,000
LP = 90%($80,000) = $72,000
Hypothetically - If the project required $200,000 of equity. GP put in $20,000 or 10%, and the LP put in $180,000 or 90%. The returns would look something like this...
GP Return = $28,000/$20,000 = 140%
LP Return = $72,000/40%
Thank you for your help @Connor Stark ! Great example as well.I will definitely keep that in mind.
@Darius Ogloza To counter your point, the partner finding the deals and managing the rehabs is doing everything. That partner is WAY more valuable for the business.
He could just exclude the money partner and get hard money or another private lender at 8%... So The real skills lie in finding deals and managing the rehabs. The partner doing that should get most of the equity.
There is so much money out there, but very few people with the skills to find great deals and manage projects well.
The all cash partner should do 100% of the costs. The split for that should be 50/50.
Dan, I do not think we are disagreeing at all. If you personally have the heft (knowledge, experience and financial wherewithal) to make a deal happen from soup to nuts, then that kind of split may be in the hands. To tell a newbie that he/she can get a deal on those terms right out of the box, though, would, in my view, be a kind of real estate malpractice.
From my perspective there is a reason these partnerships are not common. The only thing that is absolute is the purchase price. Everything else is TBD. These are the questions that remain unanswered at the time of a partnership agreement;
-How good of a deal is it (will find out after appraisal)
-How hard will the renovation be (after it’s done)
-How hard will it be to manage (after a renter is placed)
This is where the relationship is important. The first deal one of you is bound to get hosed but then I would come back and negotiate something that is fair on the next one.
I recently did this with a partnership. I totally undervalued what I brought into it but the project was way easier and more profitable than I anticipated. My partner did super well, I did ok. He said “anytime you want to do that again, I am game”. I would probably make some tweaks but you can’t know that, without doing the deal.
you might only be putting in 10% but if your giving up your commission you might want to add that to your contribution. if not all your doing is giving the commission to your partner at what ever the split ends up being. I did a Partnership like this. in my opinion something of a reduced commission say 3% instead of 6% on buy and future sale, still keep it at 10% you 90% him with you doing all the work. and split it 30% you 70% him.
Thank you for the contribution @Account Closed ! Great advice from both! I'm sure there will be things needing adjustment as we go but my goal is to minimize those by thinking about everything upfront.Robert, I'm currently at a similar number to what you suggested and I'm willing to go little lower for the first few transactions until everything starts working well and we build track record.
The only reason I wanted to do the partnership was because I knew it was a short term flip (3 months). If you are looking at how long it will take to get paid on a BRRR to me all of my "equity" is pretty illiquid. Also, alot is out of your control (Sell, refinance, buy-out, ect.)
I would try and get paid as much as possible up front (commissions, acquisition bonus, ect.), be smart with my money, and do my own thing. That way you have complete control over the process.
Lets say you are crushing it, at some point you will look at the "contributions" of your financial partner and say "I am literally doing everything, I am out". I would rather you figure that out before you start than years into the relationship. Just my .02c
Thank you @Account Closed ! There are definitely many things to consider. I will send you a message once I have everything in place and present you the full picture. I would love to get your honest opinion and see what you think!
My father has been involved in all aspects of RE (loans, residential agent, commercial agent). Around 1995 he partnered with a colleague who ran a capital fund ($100M+ AUM). The partner sliced off $2M of the portfolio for my dad's piggy bank to do flips; all SFR in Southern Cal ranging between $150-250K. He usually had about 5-6 properties going at a time and did about 30 in all. It was very low risk to the partner because my dad had 20 years experience and a good eye for evaluating properties and rehabs. The money partner financed 100% and my dad did everything else. He didn't usually act as the agent on purchases because he had other agents in his network with much better deal flow but I think he acted as the selling agent (not sure). The split of all proceeds was 60/40 in favor of the money partner. Given that the money partner professionally managed a lot of capital, I imagine he did a thorough evaluation to determine a proper financial arrangement for the partnership.
Obviously with buy and hold it is a different scenario because the long term equity, appreciation and cash flow of the holdings, but hopefully this helps!
My father was the money partner on a new construction project, his good friend was the builder and subsequent property manager. To my knowledge my father did nothing but provide the funding and the friend built the place from the ground up and has done all property management since (about 25 years and counting). They split the rents (after expenses) 50/50, and when/if they sell the proceeds will be 50/50. Both parties were highly experienced in their roles and I believe they are both happy with the project, the process, and the returns.
I'd offer a % return on his investment and then a profit split thereafter since you are managing this investment.
Example of a JV split:
He'll get 8% preferred simple return on his money. Any profits above this return will be split 75% to him and 25% to you as compensation for your management fee.
You could charge only an acquisition and management fee instead if he feels the split is too rich for you or you could offer to cap the 75/25 split at a certain dollar value and thereafter, it defaults to a 90/10 split representative of the cash contributions.
Excellent question. I will try to put a background so its easier to understand my overall view.
I would start saying i believe 50/50 in profits would be fair ( you look for property, rehab, etc, he pits 90% of money). But having investing in holding, that might be not fair. I believe the best scenario is to have average if 30% profit in the property. So for the 100 you guys put ( 90-10), you end up with 130.
If thats the case, imagine you take the 10 back, plus 15 of the profit. You would get 25.
On the other hand, he put 90 and end up with 105.
If you believe in what i am putting, your partnership should end as 105/130 for him and 25/130 for you.
If you believe you will only improve price by 20%, you would have 20/120 and he 100/120.
In both cases, 20% seems to be fair value of the partnership.
Apologies if this was already mentioned in the thread.
Have you considering structuring so that some of your partner’s contributions are not equity-based but debt?
For easy example.... let’s say you two are going to buy and rehab a property in which acquisition and rehabs costs total $100k. Instead you putting in $10k for 10% and him $90k for 90%.... you put in $10k for 50% and he puts in $10k for 50%. Then his additional $80k is a loan to the corporation at specified terms. And your hours spent also carry an hourly rate.
So after the flip sells or brrrr refi’s, his $80k is paid back with interest and your hours spent are paid. What’s left after that is split 50/50.
@Alberto Nikodimov This js commonly done in syndications. The GP does the work and LPs invest the money. Typical split is.70/30 for the investor after a preferred return usually around 8%
I would like to provide an opinion and agree with the person that had the Question. Why partner with someone? Unless you do not have the funds or do not want to use any of your funds or Don't have any prior experience and are a complete newbie. If none of these apply you are not getting a fair deal, and in this case, you are getting the smelly end of the stick and will be working way too hard for a (considering the numbers you provided and for simplicity) 60/40 split. The only way I personally would agree to that is if we both agreed to have responsibilities and it's not going to be the same for each property. Every property and deal will not be the same. Therefore a new agreement may be necessary for each property. What may be a better and fair example would be something like a one-year loan term at the going rate and with depending on the deal and amount of the loan 5-10% of the net profits. Otherwise, you would be better off finding private lenders and doing your deals alone and refinance after completing the rehab. there are plenty of private and hard-money lenders that will also do a 30 yrs term on rentals property these days. The main thing to consider is the deal. If you were able to negotiate and get a good discounted deal, that will provide a really good a A.R.V. or at least control the property with excellent creative financing with the owner/seller, or even a win/win creative financing for a distressed situation, with a low interest rate worth keeping in place and providing a good positive cash flow. The split otherwise would be more like 80 /20 at the very most and that I believe is on the generous side and, without you not forking any cash out of your pocket. Your skin in the game will be the deal, time, sweat, and headaches you will no doubt be suffering. If the tenant loses their job and can't pay the rent. Or the bread earner leaves the family for a younger lady, life is full of surprises. Especially since you are finding the property at a discounted price. And doing all the work? , you need to have every issue covered otherwise you're going to have disagreements no doubt. I would consult with a good real estate attorney with experience in the matter. Is your best bet because there is so many problems and issues that can and no doubt will happen. You will no doubt feel it's not a fair deal when you have to deal with the issues of bad tenants, evictions, roof leaks, plumbing clogged, etc... Are you going to hire a property management company? Without looking and considering all the issues and addressing the responsibilities in a contract. It can get ugly even partners with family have gone bad. That could ruin life long friendships. But on the other side, it also can be a beautiful thing and win/win for both of you if everything is well thought out considered, understood, and planned. And in writing. Good luck and best wishes.
For those saying the money partner should have a majority stake, I respectfully disagree. The other partner is finding the property, putting the deal together and managing the project plus making an in kind contribution of taking no commission. The money partner is injecting 90% of the purchase price into the deal but it’s short term. As soon as the refi is done and gets his capital back does he deserve more than 50% of the equity?
I know two peers with a similar arrangement who go 50/50. It’s an interesting topic of conversation for sure! Would love to hear more arguments as to why the money partner deserves control.
At the start, especially if you do not know each other well, it may not be a bad idea to draft the agreement as explicit as possible. Some costs such as commissions and management fees you can charge them at fair market prices, so after the property is sold, distribute the cash in the following orders:
1) Return the initial investment capital back to investors, you 10%, partner 90%
2) You take 3% buy price + 3% sale price as commission , plus 10% of rent as management fee
3) Now see how to split the profit: think about how much of your time and effort worth (A), and the potential profit (P), A/P will be the minimum share you will get.
If there's any loss, you can take 10%, partner take 90%.
After you work together long enough, have mutual trust, and know the potential profits well, you may find a simple split like 30/70% .
I'm going to shoot it straight with you.
With him being 90% of all the cash and zero % deal flow responsibility and you being 10% cash, 100% of the deal flow responsibility, waving your commissions, waving your management fee, you finding the deal and processing all the paperwork.
You should offer him a 60/40 split (you being 60 and him 40) after you guys BRRR the property and pay him back his 90% plus any expense and you back your 10% plus any expenses.
After refinance both of you have all your cash out and should split the net cash flow 60/40.
The reason I believe you should have 60% is because you found the deal, negotiated the right number, put all the people in place to execute the deal, managed the execution of the deal, did all the paperwork for the deal and you are waving all your professional fees. All of what I just mentioned about is a million time more valuable then just his MONEY. His 90% cash is no where near the equity of you making the whole deal possible.
If your friend/ partner wants to be 50/50 partners with you after paying all expenses then he needs to include paying you for realestate commissions and management of the deal.
Nothing in a Investing Partnerships is FREE! If you are leaving money on the table that would in any other deal be a expenses is you INVESTING in the deal. It's your skin in the game.
So your 10% cash, plus commission fee, plus management fee, plus deal finding assignment fee is all your skin in the game. That skin far out weighs his 90% cash. MONEY is very easy to get and much cheaper then 50% split if the deal is a BRRRR deal.
If I was him I would be happy with being able to park my money for a 100% return of my cash and 40% equity stack in cash flow for life. That's winning because he didnt have to do any thing but know you hahaha.
You want to sweeten his pie some pay his 90% and your 10% cash 8-10% interest when you refinance.
You and him are great friends and if you want to keep it that way you need to be strictly business with him and let him know now that MONEY is great but money does not find good deals, PEOPLE DO!!!!
Never give up crazy equity for cash when you can just work in a higher interest for it and keep all the equity for yourself.
Best of luck
@Darius Ogloza but 90% cash is doing nothing for the deal. It is just money only. He is finding the deal, putting the deal together, managing the deal as well as laying his commissions to the side for the deal.
His partner is basically playing bank only!
Not sure if you use hard money lending but they are typically funding the deal you bring to them for up to 80 or 90% LTV or the ARV. Image if your lender told you because they were lending you the money they and 75% of the deal. I'm certain you would tell that lender to go kick rocks.
The deal presented is not the lender it's the investor that found the deal, put it together that is the value
Does that make any sense to you?
@Jason Crittenden You are spot on my friend. Money only should never mean equal or majority equity in a deal. NEVER!!
We do this exact structure with our investor and it works beautifully for both parties. We do 90/10 capital split and 50/50 ownership. We handle every bit of the work + find the deal and our investor is only capital.
I’ve heard seasoned investors scoff at this structure because why would the capital investor not do the work themselves or hire it out, then they’d be 100% owner? Because that’s assuming the capital investor a) has the knowledge and skill b) has the time to do this c) understands the market. If they do and have the time, great! Then maybe for them it wouldn’t make sense to partner. That’s not everyone’s position.
You’re bringing the value here if you’re doing the work and finding a great deal. Money is not difficult to borrow. IMO I think it’s more adventurous for the capital investor than it is for you. You’re making it happen and they get their money back after the cash out refi then get 50% ownership and revenue split. What a deal! I actually hope to be in this position one day! For me personally, I’d never take anything less than 50% and it might make more sense for you to do hard money anyway and retain full ownership. :)
@Joe Edwards 100%!!
Can you clarify your previous relationship with the investor? It looks like you said he invested through you as you being the agent, is that it, or did he loan you money for your own rehabs? Makes a big difference on who needs who. Did he have full ownership before and he is offering to bring you on as an equity partner - if so, he is doing you a favor.
50/50 is fair, or 60/40 to the investor as a general rule. However, if you are 10% of the investor you would get 10% of the investor profits/equity, and sometimes would still get the commission when buying/selling.
I disagree with most posts above. Investors and workers need each other. If you didn’t need the investor you could borrow money from a bank in the 3-4% range now and keep the equity for yourself. If he had enough people to find deals he would just pay someone commission and finders fee and a rehab/management fee. Everyone sees it from their own perspective and how important they are in the services or cash they bring, but a lot of people - especially starting out need to partner to grow and it’s mutually beneficial.
Part to have part of a whole pie then none at all...
@Joe Edwards The OP made it plain that the partner in this case is an experienced investor who used the OP as a realtor and who now is willing to cut the OP into his deals provided the OP can come up with 10% of the cash so that "he has some skin in the game." This is plainly an invitation for a relative newbie to take a slice of equity in a mature business. Under these circumstances, demanding 50% or 60% will not only blow up any deals but will likely blow up the relationship itself.