How to Structure a Partnership for Flips?

[Jamie C.]

Hello All - I'm a complete newbie to real estate investing so please bear with me if my post is lacking the requisite info. I recently joined BiggerPockets; it's a great resource and I've been digging into articles. My brother and I are looking to form a partnership to flip properties. We're looking to start with a smallish flip to get our feet wet, limit our exposure and gain experience for bigger (and perhaps different) deals down the road. 

He's done some GC work and will be the hands-on rehab guy, designing, doing a lot of the work, hiring subs, holding the insurance for the work, etc. He works for a retail kitchen design center but isn't putting in many hours there and will have time for our flips - probably 25 hours a week on the flips. I'm the money person and also handling the business side (what that entails remains to be seen but working with the realtor, handling paperwork, drawing up business plans for lenders, etc.) I'll also be doing some manual labor here and there to assist where possible but I'm not handy at all and my other full time job precludes me from putting in more than about 15 hours a week total in our flip partnership. I will fund the entire project, likely through a combination of HML, HELOC and personal savings. He has no real assets/liquidity to fund rehab cost overruns or a potential loss, so that would be on me as well.

1. In terms of a financial arrangement between us, what do you think is a fair percentage split of the profits?

2. Out of curiosity what type of deal is standard when the person funding the deal is doing nothing more than providing funds?

[Steve K.]

@Jamie C.

Everything is possible in such a JV. An investor with the cash, vision, deal-locating-knowledge and taking all the risk, would keep all the reward if they merely hired a quality GC.....and directed the design/selection of floor plan/scope/finishes themselves. If you try and pay your quality GC too cheaply, he'd get attracted away to another investor or retail client(s).

A quality GC with a reasonable knack at finding a deal could do without you if he knew a hard money lender, and could finance it.

I'd encourage you to consider "where does the value get added?"....is it mostly in finding the deal? Is it mostly in executing the plan quickly/keeping on budget? Does the contractor add value in designing the floor plan/scope/finishes that you can't do? Is it mostly in providing financing? Which tasks are worth $15/hr and which are worth $200/hr.....not all time is necessarily valued equally. If you spend 2 days finding and negotiating a deal that locks in $10k extra profit margin, would you trade that 16 hours of  "value adding service" for 16 hours of manual labor? If he spends 8 hrs  collecting subcontractor bids, that might be "expected" in his % profit sharing. If he added value by saving $2,000 on materials/labor, would he get a "bonus"?

It might be helpful for you to think of it as if there are 3 partners:

1. Jamie1 with the money, and taking the risk of financial loss, applying for loans, insurance,
2. Jamie2, contributing hours and knowledge on deal-finding and some project management and/or hourly labor, or hours at accounting?
3. GC-Brother, contributing hours and knowledge as general contractor and some hourly labor

Jamie1 feels a little like a hard money lender. He might be entitled to all of his money back first and x% interest, for taking the risk (and/or a % of profit). After paying all costs (including Jamie1) the other two can split the profit in proportion to their time/value adding, might be 75/25 or 50/50 or anything else.

You might also consider what the going rate for a full service contractor is. What if, for example, all materials and labor are paid by "investor" and GC gets paid 8% or 10% of that amount for GC management services. Maybe Jamie1 gets paid first, GC-brother gets 8% of hard construction costs (minimum) and the rest is the profit to be shared y%/z%.

Good luck