How Much Equity / Profit Sharing Would You Require?

[Tyler Hodgson]

If you had outside investors who would supply 100% of the capital needed for the down payments on some rental properties but you had to take out the mortgage in your name and title would be in your name, how much of the net profit would you require to take the risk be involved in the deal? Assuming of course there are some legal agreements behind this that protect both parties. Would you want a 50/50 split on all profits (net income and proceeds from sale or equity cash-out) or does one side deserve more of the profits than another.

Just curious to get some other opinions on this. Thanks!

[Allen Fletcher]

@Tyler Hodgson

This really depends on how you are going to structure the deals. If you are approaching your investors as lenders than they get a rate of return on the money that you borrow from them. You get to keep 100% of profits after paying them their agreed upon interest rate.

If you are setting these investors up as buying equity in the deals then it really depends on what level of involvement that they have. If you are putting all of the work in and no capital 50/50 is usually pretty good. If you are putting capital and time in you can easily ask for more like 65/35. If you are providing capital, time, and business infrastructure (i.e. payment systems, advertising, property management services, etc.) you could go as far as 70/30.

One thing I have done is to bring partners in on a mixed system. Every dollar of profit was divided 60% towards equity 40% towards salary. Partners that put forth capital and nothing else would get returns according to the number of shares they own in the property. Thus, if they put forward 100% of the capital needed for a property they would get 60% of the profits, but if they put in 50% of the capital needed they would get only 50% of the profits going towards equity holders.

The remaining 40% labeled "salary" was the portion of the profit that rewards partners for their time. In our situation this portion went to the partner that took care of maintenance, tenants, turn-over, rehabbing, etc. The 40% was divided among partners according to what they accomplished and how long it took.

This system worked well with exception of a couple of instances of the salary portion. There were minor disputes on who was deserving of what percentage according to the work completed on the property.

Hope this helps,

Allen Fletcher