What is fair in a equity partnership

Question

Hi everyone, I have a question of how to structure a fair equity partnership. I have been tossing around the idea of doing buy and hold for quite some time now and I have gotten pretty serious about it the last year or so and am learning as much as I can. I started house hacking my home when I first got it about 8 years ago before I knew what house hacking was. Now I would like to further that knowledge and excellent it. I was hoping to go to a few investors I know and partner with them to brrrr a few property's. I would find and manage the property and am looking for them to just be the cash in the deal. I know there are to many many ways to list on what that might look like what what are a couple of the common ways to set that up. So here is what I was thinking please correct me if I am wrong but like I said if I do all the work and they just put up the money and split it 50/50, so with a brrrr do I pay them back there up front money then, split the remaining equity and cash flow? I guess I'm just trying to get a fair idea in my head so I dont look like an a$$ when asking for a partner, thank you everyone in advance for your input.

Tyler Gibson · Answer

@Jason Huff I am of the opinion that my time is valuable and so is my knowledge. If I was doing a deal where I had all the knowledge and time I would want 50%. If I am also putting in 50% of the funds then I probably want a bit more than 50% more like 70%. the other question is, will your partner be asking you about the process, trying to learn or just giving you money and being hands off? If you're going to be teaching him the process then you might want to be firm on a higher equity position. It is all a matter of creating a win win for everyone. With your partner taking the refi in his name he gets all the tax benefits so that alone should be an added value in his favor.

Tyler Gibson · Answer

@Travis Harden Fair is going to be whatever you can come to an agreement on. I know that answer doesn't really help you but that is the reality. If you already know some people you think might partner with you then just have a conversation. Tell them what you would like to see happen then let them tell you if they would be interested in the deal you are proposing. They may counter that they want more equity or more of the cashflow or who knows what they might want but then it will be a negotiation. I would think once you have a successful track record you can show investors you could dictate terms a bit better. However until you have that track record that shows how you are worth the 50% equity split you might have to settle for a bit less. But have a conversation just be sure that you have some numbers to offer as it relates to costs and split. Last thing you want is to talk to someone throw out the idea and have them start asking you specifics you can't answer. If you get in that situation they might not take you seriously.I hope this helps some.

Tyler Gibson · Answer

I hear ya man good luck. Come back and let us know here in this post if you get a partner and what you decided to do about the split. It could help the next guy with the same question.

Travis Harden · Answer

@Jason Huff yeah, point I never even thought about assigning value to who's name the refinance was in. I dont know that it would have much value until I could not put them in my name any longer but yes good to think about before I am backed into a corner with that decision. I would think if you two are 50/50 with money in and not 50/50 with the work in the deal you definitely need to be compensated. What If you put it in a contract to get paid a few thousand or what even you decide to be paid for running the rehab and get paid that before the equity split when the property sells down the road. As well as what if you just paid your self like a property manager for managing it. Then you could just save the extra cash while being paid for the extra work. Like I said just trying to figure it out my self.

Travis Harden · Answer

@Tyler Gibson definitely.

Jason Huff · Answer

I have nearly the exact same question.  I have a partner who wants to match 50/50 to acquire a house to BRRRR, with me overseeing all the work.  I have some experience (2 rentals, equity in an apartment complex equivalent to 6 units).  But it's unclear what value can be assigned to "overseeing all the work."  I won't swing a hammer, but I will run the entire show from acquisition, to rehabbing, to leasing, to managing.  The partner will simply provide 50% of the acquisition and rehab funds (the partner may take the cash-out refi in his name).  Can anyone provide a rough range as to the value (in terms of equity) one might assign to performing all the work in a BRRRR (and all the management work thereafter)?  @Travis Harden and I could then substitute an appropriate value into our respective deals.  Also, what value (in equity) might be attributed to taking the refi mortgage in one's name?  Thank you in advance for any insight you may be able to provide.

Travis Harden · Answer

@Tyler Gibson ya I agree, I was just looking for a starting point and you like you said I might get that maybe a little less so I'll start there thank you for the reply. Even just typing it out helped me talk my self through it.

What is fair in a equity partnership

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