Ownership/Compensation Structure & Sweat Equity Advice

[Daniel Jackson]

Hello!  I'm new to the community, and I was hoping to attain some advice.

My sibling and I are going to acquire a small office building, which will be leased to tenants.

My sibling solely provides the capital for acquisition, which will be an all cash deal with no financing (I know that an investor can diversify into more properties by being open to leverage, but it's my sibling's decision). Everything else with regards to the property (e.g., finding the property to acquire, closing, leases, property and tenant management, reversion, etc.) will be done by me. In short, my sibling is the bank, and I am everything else (the sweat).

This works out well, because I am still saddled with student loans at present and do not have capital to invest, whereas my sibling has capital to invest and needs to diversify their retirement portfolio’s income streams.

Income Before Taxes will not be disbursed, but retained to buy future properties. Has anybody ever done this, or know how somebody did this? My sibling and I are trying to determine what would be an equitable approach to compensate my “sweat equity” given the initial ownership structure of my sibling's 95% and my 5%.

Initial thoughts have been to transfer ownership units from my sibling to myself, and Income Before Taxes retained each month would also be determined by the ownership percentages. This would continue happening until we are both 50/50 owners, although we have no idea at what rate. I was thinking about determining an average hourly rate for a property manager in my area, but I'm not sure how good that would be.

Thank you for your time and help! Any guidance/advice would be greatly appreciated!

[JD Martin]

Easy answer: get professional quotes/estimates on everything that you will do. Then you will know the value of what you are doing.

Example: Bro/Sis pays $200k for building. Let's say you:

1. Initial rehab, $5k in labor.

2. PM, 200/mo = $2400/yr

3. Admin work, $50/hr x 100 hrs = $5000/yr

According to that simplistic model, your one-year worth for this building is $12,400. If we subtract your partner's opportunity cost (i.e. they could have invested that $200k into something else) at some modest figure (let's say 3%, or $6k), your 1 yr investment is worth $6,400.

6400/200,000 = 3% ownership stake after 1 yr, 4% after 2 yr, etc. 

Obviously this can change if you alter the numbers. If your sibling is uninterested in the lost opportunity cost of the money, you would have a much higher ownership stake faster.