Structuring an operating agreement that is fair

[Jacob Voncannon]

Since this is a similar question I thought I'd ask it here given the sweat equity part. This is my scenario:

If I was working with an out of state buyer as a partner to purchase multiple single family homes as rentals. What would be a good equity / cash split? They would be providing the capital I would most of the work finding the deal, negotiating, managing rehab, Property Management and upkeep. I was working on these assumptions:

Cash in deal (down payment, financing rehab, etc):25k

Cash Flow: (Annual) 6.25k

This is what I'm thinking. After the capital invested, any appreciation after the sell and cashflow would be split 50/50. Does that sound reasonable? Am I being realistic?

What have others done when working with an investor's capital on a long term buy and hold strategy?

How would you handle this from an operating agreement and equity split of a company like an LLC?

I would be looking to do this on several houses with a single investor.

[Jeff V.]

Jacob,

I've came back to this post 3 times now trying to come up with good advice for you.

First time I tried to answer without knowing what your investor partner's goals were and there were too many variables to account for.

Second time tried to give a parallel by offering up the structure that my business partner and I have, but it's not the same as the scenario that your describing.  So I figured it wouldn't be very helpful.

Final Try...  An operating agreement is just that, an agreement between you and the other partner.  However you decide to split up the profits has to align with your and their individual goals.

I will add this,  When you get a rough draft nailed down, take it to a lawyer to have them put their "What IF" scenarios in to be sure you are BOTH covered.

Examples:

What if you take ILL and can't perform your end of the deal.  

What if your investor decides they are better off putting the money in the stock market rather than investing with you?

What if your investor dies?

What if you die?

What if your investor gets a divorce and now you have a third partner that isn't contributing anything but wants his/her cut of the profits?

What if you get a divorce and now your partner wants their piece of the profits?

What if you disagree on business decisions and direction?   How do you resolve that dispute? Mediation, Arbitration or Litigation?

If that method fails what is your backup plan to resolve disputes?

What are the roles of each party?  You are the active partner, but will your investor have any active say in the decisions that are made or will he/she be a silent partner?

What if you decide to take on another partner...  will your existing partner have any say in the selection process?  

What if he/she doesn't like the partner you pick and wants out?  How do you go about dissolving the partnership?

So on and so forth...  so many things to think about.  Be sure you have your I's dott and T's crossed because most partnerships end up in business divorce per se...

Hope this information helps get you going in the right direction.  Sorry I couldn't be more specific.

Jeff V