whats best 40/60, 50/50, or 25/75 when starting out?

Question

Ok so lets be realistic, obviously new investors or amateurs aren't going to be able to get professional investors to give a majority profit on new ventures , but what is the best way to start a partnership percentage speaking? And then when should the partnership be restructured, after X deals, after X time, or after X amount is made?

I've currently locked in a partnership with an experienced investor, but I know I will be providing more value after I have learned more about certain deals and lending. What I'm looking to know is if I'm finding the deals but they have the money and know how (which seem to be easier to obtain), what should the profit split be when starting out, after a few deals, and then 2 or more years later?

Theo Hicks · Answer

In partnerships where one party is finding the deal and the other party is doing everything else, the deal finding party is usually compensated with a sort of finder's fee. If the deal finder were to receive equity in the deal, it would be a maximum of 20% (15% is more likely).

That said, if you are interning for this experience investor, a salary is also another option.

The increase in your compensation will be in the experienced investors' control. Sure, you can ask for more, but it is ultimately their decision. But, I wouldn't expect an increase for a year or two. Think about it from their perspective: if they are an experienced investor, they've seen many "new investors" come and go. So, they will want to know that you are serious and in it for the long haul before they start giving you equity in the deal.

Honestly, if I was in your position as a new investor with no experience who found an experienced investor to partner with, I would be less focused on how much money I will get paid in the short-term and more so on how I will use the experience I gain to make exponentially more $ in the future.

I'd accept whatever he offered and get to work.

(All of this is assuming you have minimal experience and this other person has been investing in real estate successfully for years. If you are on similar levels, then my advice would be entirely different).

Nathan Gesner · Answer

It sounds as if the investor is providing all the capital and you're simply locating the deals. Your share is similar to what a wholesaler or REALTOR would provide so I think a one-time payment would be appropriate. this could be a flat fee or (preferably) a percentage of the purchase price. You may even want to get creative and ask for a percentage of the immediate equity. For example, the property is purchased for $150,000 but has an ARV of $250,000 so there's an  immediate equity gain of $100,000. Your fee would be 3% of the purchase price ($4,500) and a 3% "bonus" for the equity game ($3,000) for a total of $6,500. I think that's pretty fair though my percentages are just pulled out of thin air. The better the deal, the higher your reward should be.

I also think it's appropriate to break down your responsibilities and then negotiate payment for each task. You make money for finding the deal and negotiating it to close. If you manage it, you get paid for management. If you coordinate renovations prior to renting or prep it for flipping, you should be compensated for that work.

It just depends on what services you provide. Payment, at least the big payments, take place when goals are met (sale, equity cash-out, leasing, etc) rather than as you go along. And the person taking the financial risk should get the greater share of the reward.

Matthew Oakes · Answer

That's great advice Theo, I would say this is an investor with 20 buy and hold deals but only 2 fix and flips that were done in the past 5-7 years. This investor brings to the table the money, the contractors, and the know how. My value is that I'm currently the acquisitions manager for a wholesaler and have done 30+ deals this year and know how to analyze different neighborhoods which opens this investor up to being able to do more deals with larger profit margins. So definitely value on both sides. I would argue more so on his side though. From what you said I would asses that I should use 15-20% as my benchmark and negotiate up from there once my value can be proven through increased deal size.

I do see your point with the here today gone tomorrow investors, being that you take risk every time you turn and burn new partners. Thanks Theo.

whats best 40/60, 50/50, or 25/75 when starting out?

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