New Partnership for buying property. And sweat equity

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New Partnership for buying property. And sweat equity

Chad Kastel
Rental Property Investor · NY · Member since 2018 · 126 posts · 42 votes

I've formed a partnership for purchasing a property. My partner and I are trying to assign value and equity to each partner.  It's our first time working a deal with a partner and both want to be fair without being taken advantage of?

Jeff:  - Providing 100% of  the capital. 

                        -  Doing all the research and making the analytical decisions

                       - Does not live in the area planning on purchasing in

Dan:    - Grew up in the area and has intimate knowledge of the streets and connections

                          - Can do ALL construction and repairs

                          - Qualified Inspector

                          -  Will manage the property.

Jeff could just hire a construction worker, property manager, repairman,  inspector (and anyone else necessary) and pay them per diam.  But decided that based on Dan's skill-set he would rather give Dan sweat equity.  Jeff feels Dan will work harder and take care of the property even better if he owns a piece of the property.

The question is what is Dan worth to Jeff?   How much equity should Dan be able to work up to?  How does it scale?   If Dan was going to earn $500 per month for all his service, does that $500 get applied every month to his equity?  Or do we do it quarterly,bi-yearly, or annually to make tracking easier?

Thanks for all you help.

Chad

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Daniel Reyes
Specialist · Tampa Bay Area, FL · Member since 2018 · 106 posts · 72 votes
7y

@Chad Kastel

Hey Chad,

In this instance, I would err on the side of @Caleb Heimsoth's comment, and add - it is not typical to allocate equity or an LPA in this kind of relationship (0%). The typical way to maintain this kind of relationship is to keep this "fee-based"; inspection fee, property management fee, etc. In fact, for much larger multifamily deals, it is not standard for property management companies, who manage the day-to-day operations and manage capital renovations, etc. to take equity stake in the asset. I would recommend sticking to best practices here, unless there is quantifiable evidence to suggest otherwise.

All the best to you! Congratulations on the partnership, I am sure it will be productive :).

Daniel Reyes

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  • Daniel Reyes
    Specialist · Tampa Bay Area, FL · Member since 2018 · 106 posts · 72 votes
    7y
    @Chad Kastel Hi Chad, Thank you for posting! Based on the detail provided, Dan is the only capital investor, and Jeff is perhaps taking on the duties of a sponsor (quasi-GP). In this case, there is a wide range in how the equity split has been allocated in these kinds of scenarios. We may consider what specific value Jeff will add over the life cycle of the investment. A few questions: 1. How many partners? 2. What is the role of each partner? 3. Is this a SFR or multifamily deal? Please let me know your thoughts. All the best, Daniel Reyes
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  • Chad Kastel
    OP
    Rental Property Investor · NY · Member since 2018 · 126 posts · 42 votes
    7y

    Hey Daniel,

    Thanks for getting back to me.

    1.  Two Partners.

    2.  Jeff's is Providing 100% of the capital.  He is reading all the books, listening to the podcasts, dealing with the real estate agent, analyzing all the deals, and making ALL the decisions on whether to actually purchase each property or not.    He will taking care of the book keeping.  He lives 1,000 miles away from the location.

    Dan is physically going to the properties, inspecting them, determining how much work needs to be done.  He will do construction work (split the costs) if it's needed.  He will manage the property and do all the repairs.  He will be consulted on the local area since he grew up there.

    3. The deals we are looking at are mostly duplex's or very large SFH in college towns that have 8+ rooms (so more like a triplex)

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  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y
    @Chad Kastel. Off the top of my head if I’m Jeff or the capital partner I’d probably say no more then 25-30 percent equity to Dan, maybe even less. Since he has no money in the deal his risk is essentially zero. I probably wouldn’t want a partnership where my partner put in no money. What’s the incentive to stick around if something bad happens ?
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  • Chad Kastel
    OP
    Rental Property Investor · NY · Member since 2018 · 126 posts · 42 votes
    7y

    The theory is Dan will take better care of the property if he has a piece it in.  Dan doesn't make any money unless the property makes money.   So unless the deal is a bad one (which is Jeff's responsibility to analyze,) why would Dan leave?

    In addition, if Dan doesn't do the work he says he is going to do, then Jeff can just move on and replace him if necessary.

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  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y
    @Chad Kastel. How can Dan just be replaced if he’s an equity owner? You’d have to buy him out. If big issues happen repeatedly dan may decide to leave since he’s got no money in the game and he’s making a paltry couple hundred bucks a month assuming you’re just buying residential properties
    0Reply
  • Daniel Reyes
    Specialist · Tampa Bay Area, FL · Member since 2018 · 106 posts · 72 votes
    7y

    @Chad Kastel

    Hey Chad,

    In this instance, I would err on the side of @Caleb Heimsoth's comment, and add - it is not typical to allocate equity or an LPA in this kind of relationship (0%). The typical way to maintain this kind of relationship is to keep this "fee-based"; inspection fee, property management fee, etc. In fact, for much larger multifamily deals, it is not standard for property management companies, who manage the day-to-day operations and manage capital renovations, etc. to take equity stake in the asset. I would recommend sticking to best practices here, unless there is quantifiable evidence to suggest otherwise.

    All the best to you! Congratulations on the partnership, I am sure it will be productive :).

    Daniel Reyes

    1Reply
  • Trevor Schuler
    Contractor · Summerfield, FL · Member since 2018 · 32 posts · 8 votes
    7y

    Sounds to me as if you could partner 50/50 if things go well on the first. They always say on the podcasts that it's not about making all of the money. Sure you could find other ways to make more money for yourself, but in this case your relationship with the sweat equity partner could pay off and would incentivise Dan to work even harder and maybe more successfuly. It just sounds to me like a good partnership where they compliment each others skills.

    1Reply
  • Chad Kastel
    OP
    Rental Property Investor · NY · Member since 2018 · 126 posts · 42 votes
    7y

    @Trevor Schuler

    Jeff is kind of in the middle of all these ideas.    0% is too little and 50% is probably too much.  The goal is for the partnership to progress to 50/50 on every deal.  It's really a perfect partnership on paper, Jeff and Dan fill each other's gaps very well.  They are both thinking about the big picture.   Jeff's not particularly worried about Dan screwing him, so it's more as if they're both able to do their jobs effectively.   

    And just to clarify.   The way Dan will be gaining equity is after he does something.  So if he goes and does $1000 worth of labor, instead of paying him cash, Dan will now own whatever percentage of the property $1,000 is worth.  

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  • Bo Goebel
    Rental Property Investor · Nashville, TN · Member since 2017 · 108 posts · 66 votes
    7y
    @Chad Kastel Anyone putting their money in the deal should have the lion’s share of the equity. I’d recommend a 30/70 split just based off of that. Given specific break-down of strengthens and experience plus the tasks completed by each member, I think anything between 20/80 & 40/60 would be reasonable as well. Based on what you’ve shared about this situation, Jim seems to have the expertise, so I’d say equity would sway closer to the 20/80 breakdown.
    1Reply
  • Chad Kastel
    OP
    Rental Property Investor · NY · Member since 2018 · 126 posts · 42 votes
    7y

    @Bo Goebel     @Trevor Schuler @Daniel Reyes  @Caleb Heimsoth

    I Wanted to reach out and thank you all for your input. Remember this is only for this deal, If I'm making a mistake, then it won't be that big of a mistake. What we decided on was an 80/20 split in Jeff's favor. Dan doesn't get any of the 20% until he actually puts in work to earn that percentage. Jeff can always buy him out by paying what Dan has paid in to the business. I'm going to be putting offers in starting tomorrow. Today Dan brought be a BRRRRR deal that has the potential to be bought for 70% ARV, so I'm getting more and more confidant in his abilities.

    For non biased responses I changed my name to Jeff in this question.  I was very much concerned with getting the best opinions and not what I wanted to hear.

    At some point in the future I will update with how the partnership went.

    Chad

    2Reply
  • Bo Goebel
    Rental Property Investor · Nashville, TN · Member since 2017 · 108 posts · 66 votes
    7y

    Looking forward to hearing about it. You could be on to a great partnership, and if not, you'll learn soon and (hopefully) on a smaller deal. Good luck!

    0Reply
  • Craig Garrow
    Real Estate Broker · Malone, NY · Member since 2013 · 345 posts · 70 votes
    7y
    This is a cool idea. I’m in a 50-50 partnership with somebody on a small self storage facility. We’re looking at doing another one and this guy has way more cash than me, so I might kick in 20-25% of the purchase price, then manage the property for “free” and keep using my equity payments to buy in for the next 25% until we reach 50-50 on that one.
    0Reply
  • Chad Kastel
    OP
    Rental Property Investor · NY · Member since 2018 · 126 posts · 42 votes
    7y

    @craig garrow  

    These deals do have drawbacks. But I think the upside is there.  owning 50% of a property (as opposed to 100%) allows the owner with cash to buy 2x properties and have a natural hedge built in.   Or it gives the ability to diversify in to different strategies.   Keep us posted with how your deal works out 

    Chad 

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