Investor splits (how to divide who has what share)

[Charlie McVan]

We are investing in a one parcel, 2 home property (Cleveland) and wanted some feedback on how, in fairness to split investment. Here is the scenario, my parents are putting up down payment and closing costs, my wife and I will live in one house and rent the other. We will be responsible for getting the other housed leased and all payments on mortgage. Our thought was to take the entire back house rent $1000 (easy for number comparison) take $500 and put it towards housing savings, $250 parents cut, $250 my cut. But now that I am thinking through that it doesn't make that much sense. Ha.

The point is: we want to equal their investment, and then move forward as equals, however they put up the downpayment and closing, we are paying the mortgage, landlording, upkeep, etc.

Any thoughts? Thanks!

[Matt Motil]

You could always structure it similar to larger multi-investor deals where expenses and reserves are paid up front and then the profits are split up based on the investor split or percentage. You are the one "managing" everything, so you would be the general partner and your parents are the investors for their contribution in the deal. I've seen pretty much any kind of split, but a 20% cut for the general partner and 80% for investor is common, in my opinion. 

If you have any questions about how these kinds of things are put together or more details on splits, etc, just send me a message. 

[Jason D.]

First off find out what they want. If you're the only offspring of theirs I'm sure equity is fine but if they want repayment you would need to divert cash flow to them and repay that loan.

If they're ok with equity devise a plan for cash flow. Using cash flow for personal expenses only stunts the performance of future investments. Tell them the cash flow is essentially dividends and most rational investors reinvest the dividends to facilitate growth. However, if their goal differs from yours which can be the case given their age you could give them 50% of the cash flow and call it a day. Regardless 50/50 equity partners for the two of you and you can charge for property management.

[Matt Motil]

You could always structure it similar to larger multi-investor deals where expenses and reserves are paid up front and then the profits are split up based on the investor split or percentage. You are the one "managing" everything, so you would be the general partner and your parents are the investors for their contribution in the deal. I've seen pretty much any kind of split, but a 20% cut for the general partner and 80% for investor is common, in my opinion. 

If you have any questions about how these kinds of things are put together or more details on splits, etc, just send me a message. 

[Charlie McVan]

@Jason D. @Matt Motil thanks guys! very helpful. i think it makes the most sense to 'charge' an amount 20% seems good for general, then 80 for common. expenses and reserves first. in addition looking at it from an equity standpoint. good stuff

[Bryan O.]

Do they want to be equity partners? Or do they just want to invest with their kid? You can always treat them as a lender, which is outside of your business. Pay them 6% on a 5/30 note if they are okay with that. In 5 years or less, refinance it traditional. Then they are out, you kept 100% equity, and all is well. If they want equity, I like the idea that they bring the money, you source the deals, negotiate the buy, run the rehab, etc. and that gets you 50/50. Make sure both parties are clear on long term strategy, i.e. can you buy them out in a few years, etc.