What is a fair percantage in this partnership?

BRRRR - Buy, Rehab, Rent, Refinance, Repeat
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What is a fair percantage in this partnership?

Alberto Nikodimov
Property Manager · Orlando, FL · Member since 2020 · 200 posts · 194 votes

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!

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Darius Ogloza
Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
5y

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.        

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  • Grant R.
    Rental Property Investor · Fort Wayne, IN · Member since 2019 · 132 posts · 51 votes
    5y

    @Alberto Nikodimov Great post and discussion. Lots of specific answers provided here, but as there are so many variables and different personal situations, general concepts and standards are best. Here are a few that I like:

    1) Keep it simple. For equity, profit, and cash flow splits, avoid "if this, then that" statements, tracking hours, predictions of future values, etc. A clean 50/50 or 60/40 across the board is an example that can work well for an early partnership. This also applies to delegation of responsibility. Don't criss-cross responsibilities by having both partners work in the same wheelhouse, i.e. you do some rehab, I'll do some rehab, etc. Clear simple separation of duties.

    2) Learn to respectfully communicate value. Skin in the game includes sweat. Many capital partners have little idea that even a small deal can take months of full time work, without pay. You are investing quite a bit into the deal, and don't need to invest cash to "prove" it. In a 100k deal example, 10k is a meaningless gesture. It also muddies the waters of standard #1 above by making both partners involved in the same area, which can lead to conflict.

    3) Offer backstops and exit plans. The capital partner, while receiving no guarantees, deserves ways out if anything goes wrong. Provide comfort to them via a lien, a sell clause, etc. so they have some hedge of protection against major loss. This is likely a huge concern for them, so address it clearly right out of the gate. Likewise, if you get caught under contract for a deal and they back out for any reason, spell out a plan.

    Best of luck. Thanks again for posting. Great ideas, everyone!

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  • Fred Cannon
    Rental Property Investor · St Augustine, FL · Member since 2019 · 264 posts · 279 votes
    5y

    @Alberto Nikodimov. If you are an agent and doing non commissioned deals on the side I think your broker should be made aware of these transaction and give his blessings. Not sure how ethical your partnership would be if it is the way you are explaining it. That's assuming you are a realtor. If you are a bird dog then that's different. You should have a finders fee and then a 90/10 partnership on each deal. That's the way I would handle this.

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  • Andrew Tozzi
    Member since 2021 · 3 posts · 0 votes
    5y

    Great discussion here and am looking for similar feedback on my partnership setup; 

    Not planning on occupying and looking for a multifamily property

    Partner 1: Financial partner - 

    - Will provide 100% of the 25% required for down payment on property

    - Not responsible for any rehab costs 

    - Equity gained from down payment is owned by partner 1, equity is split 50/50 after 

    Partner 2: Managing/Loan partner - 

    - Will provide 0% of funds needed in down payment

    - Receives 50% of equity after gain in equity from down payment is given to partner 1

    - Loan is taken out under managing partners name

    - Manages property

    - Provides funds for rehab expenses


    Does this look like a 50/50 split in resources and responsibility? My partner and I are new and we are looking for feedback to ensure both parties are happy down the road. 

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  • Eric James
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    5y

    These kinds of partnerships don't sound very appealing to me. One partner is basically acting as a private money lender. But they want a high equity stake in the proceeds, rather than a modest interest rate on the money they provide.

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