Partnership structure scenarios

[Bradley Snyder]

Hello. I am just starting out and looking for partners. Can any one recommend a proper equity split in the below scenarios:

Scenario 1:

Partner 1 is a season real estate investor that has done several flips, BRRRRs, and owns several multifamily homes. He approached partner 2, a eager to learn newbie, to invest in a potential out of state flip with him. He tells him the numbers are: purchase of $10K with rehab of $20-25K and ARV around $70-$80K. Partner 1 is seeking a $35K investment from partner 2 with a ROI of 15% in 4 months. Is this a fair deal for partner 2?

Scenario 2:

Partner 1 is an out of state newbie investor that is eager to get started. He has found Partner 2 , also a motivated newbie, in the market Partner 1 see potential for flipping. Partner 1 has enough money for a HML, good credit and a full time job. Partner 2 does not have any capital to invest but is familiar with market, boots on the ground, and has a project management background. They work together and found a home to flip with a potential $30K net profit. Partner 1 has taken all of the financial risk has the HML all in his own name. Partner 2, has met with agent, the contractor, and will be ensuring the project is on track. What would be a reasonable partner ship?

Please feel free to ping me with questions or things I might of not considered. I can't wait to see where this discussion goes.

[Will Fraser]

Hi @Bradley Snyder!  The key to your questions here, and the ongoing debate of this very thing, is the value of the Money portion of a deal and the Experience portion.  Here's my take on the scenarios you laid out:

• Scenario 1: Since Partner 1 is bringing the deal, the experience, and the high-level leadership of the deal, Partner 2 is the Money and the day-to-day oversight. Since a 15% ROI in 4 months would be an annualized 45% return, this return seems commensurate with the workload AND (assuming here) would give Partner 2 insight into the total process. I'd jump at this as Partner 2.
• Scenario 2:  These two are basically the same skill level so the trade off seems to be risk + Money (Partner 1) for deal execution (Partner 2).  IF Partner 2 shows reasonable signs of being able to execute the deal (hopefully a firm understanding of the process, experience at some level before, or at least watches a lot of HGTV) then that would hopefully earn Partner 2 a third of the deal, or you could argue for up to half of the deal depending on the workload or scarcity of Partner 2.

Them's ma thoughts.  I hope they are useful to you!