Should we form a 50/50 partnership?

Question

Hi name is Mike,

I am new to the investing world and BiggerPockets.

I have a question about starting a partnership.  So first, just a quick rundown of our situation.  I live in Cleveland and I am partnering with my brother (who lives in Chicago) to start investing in rentals.  We will only invest in Cleveland properties.  I am a home remodeling contractor and my brother has the money to get us started.  My brother will be buying the properties and I will be marketing to find the properties, renovating them, managing the tenants and providing the ongoing maintenance.

I guess my question is, what does a reasonable partnership look like in this situation?  We were originally thinking that a 50/50 partnership seemed right since he is taking on the risk.  Does this seem fair?  Should he be getting more since I have no skin in the game?  AND, should that percentage change once we have built some shared equity in the company and I can start contributing monetarily on my end?

We are about to set up an LLC and would love some input from the experienced BP community!

Thanks for any advice!

Mike

Bryan Blankenship · Answer

A 50/50 split may be fair to you guys.....but I would never be the one putting in the money into a joint LLC.

Anytime I'm 100% of the money, I own the LLC 100% myself and just create JVs or profit share deals with any other person I involve.

You can certainly form a dual member LLC, or an LLP, but you need very clear operating agreements, corporate resolutions, etc.

Don Petrasek · Answer

@Michael Dubiel I set up an LLC with two partners and an operating agreement that defines ownership interest as the % that each member's capital account represents of the total of all 3 capital accounts.  The operating agreement also defines what's considered ordinary management of the LLC and what's not.  For items that aren't, any member that performs those gets paid in the form of a credit to his capital account.  So I put up most of the $ initially and owned a large percentage of the LLC to start, but the other partners have done work on the property (that we would have otherwise had to hire out) and increased their interest as a result (without having to contribute cash that they didn't have).  This has worked pretty well but the downside is that the credits to the capital account are considered taxable income.....

No matter what you do, you guys need to have a detailed written agreement upfront as to who is doing what, when, how much and how that affects ownership interests.  Especially with you taking on most of the work.  Maybe your brother should be lending to the LLC and you should be getting paid for all the work you do....after that you split all the profits.  To compensate him for the lending risk, maybe you agree to cover part of any loss he takes on the loan to the LLC.

My brother in law was the other member in another LLC and we had a verbal high level 50/50 split agreement.  It went well for a while and then he stopped finding the time to spend on the business.....luckily we were able to amicably part ways - otherwise it would have been a disaster.

Brie Schmidt · Answer

@Michael Dubiel - It really depends on what you guys think is fair based on your work involved.  If 50/50 seems fair right now but down the road it doesn't you can also do a OA amendment and adjust the ownership percentages

Account Closed · Answer

I do a similar setup. In my case however, one of us puts up the capital and the other finds the property and resells to a tenant buyer. We really don't do any rehabbing anymore. We let the tenant buyer do the rehab. Generally we get $25k down from a tenant buyer and split that 50/50. Since we take over the properties using Subject To and Wraps, there is also monthly cash flow of roughly $500 which we split 50/50 upon selling on Lease/Option to tenant buyers. We provide the tenant buyers with owner financing so they don't have to worry about bank financing. When the tenant buyer exercises the Option to buy a few years later, generally that has bought down our underlying financing and we split those profits 50/50 as well. Whichever of us  provides the management side of the transaction has 51% ownership so decisions can be made. Everything is done inside an LLC. Very profitable for all involved. It's just another way to have partners and keep everyone happy.

Jerel Ehlert · Answer

It is even more important to get in writing what the rights and responsibilities of each person.  If the setup doesn't work and it is just business, you can dissolve and go separate ways.  But if it is family/close friends, that is a harder relationship to sever.  Write in a way to bring out conflicts in the business and resolution process.  Write in a method to buy out or get bought out - peacefully.

Talk to a lawyer.  Don't get whatever you find on the internet.

Federico Gutierrez · Answer

His your brother, I think 50/50 is good until you get an understanding of what role each player will bring to the table and how you delegate tasks among one another.

Michael Dubiel · Answer

Thanks for the advice Brie.  That is something I will bring up to our lawyer when we set up our LLC this week.

Should we form a 50/50 partnership?

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