My first BRRR as a JV...how would you split ownership and profit?

Question

Hi all, I've been doing a couple BRRRs this year but I ran out of capital so started reaching out to friends. I have a friend who wants to join my current deal and will be contributing about 50% of the capital for the purchase and rehab portion of the deal.

So I'll be providing:

Half the capital, finding the deal, taking title, managing the rehab, getting it rented, managing the PM, eventually carrying the mortgage note, and handling the long-term management/distribution of funds.

My friend is basically a passive investor and this will be his first out of state deal. For anyone wondering he is 100% trustworthy. We are lifelong friends.

I understand most people would recommend just paying him a % on his money and then him getting out of the deal once we refinance, but I want to give him equity in the property as well. I also want to treat myself fairly since I'm doing the majority of the work.

After the refinance I was thinking of returning his capital and giving him an ownership position proportionate to the dollar amount he initially gave me. So if we both put in $50k for purchase and rehab, and the house is worth $150k after, he retains a $50k ownership position while getting back all of his capital, and I get a $100k ownership position. Basically I get all the equity created by the BRRR strategy even though we both got our capital back. Does this seem fair?

Next is the question of the cash flow split. 50/50? 60/40? His stays fixed while mine increases over time? How would you structure this?

I want to be perfectly clear here that it is not in any way my intention to be unfair to my friend in the least. I want him to feel like he's getting a win but I also want to be fairly compensated for my much higher level of involvement, expertise, and risk. I've just never done a JV before and could use some guidance. Thank you!

Ted Rud · Answer

I've been thinking a lot about this exact scenario lately, as I'm looking to bring on some friends as hands-off investors in the next year or two. If you are going to be 50/50 partners (50/50 cash & equity growth), 100/0 on rental management, then I would charge a fair rental management fee. You can keep the cash flow & equity growth 50/50, but charge a 10% management fee (or whatever is typical in your market). So essentially you would pay yourself half of the management fees and your partner would pay you the other half (could come right out of rent). As far as forced equity goes, this is a tough one. You won't actually realize that equity until you sell the property and there may be additional equity created just by holding, paying of principal, etc. If you plan on doing a cash out refi, at minimum I would structure it so you pay both partners back their initial contribution, then if there's some left over, that could go 100% to you (since you coordinated all of the rehab work). This could be done immediately upon the completion of the rehab, or a couple of years down the road (would be more beneficial to you as principal would be getting paid off and the property is appreciating in value... assuming the market keeps going up). That is something that should be discussed when setting up the structure of your partnership/deal. If I was your buddy and you paid me back my full contribution and now I have 50% equity and 50% cash flow in a positive cash flowing rental property that I don't have to manage, I would be over the moon! I would be ready to go another round!The biggest thing you will want to do up front is plan with the end in mind. How long does your buddy plan to keep his investment in the property? What happens if one of you die? What happens if the market turns south and now you need to pump money into the house to keep it a float? What happens if after you pay him back and he wants to sell so he can realize his 50% equity in the property? All are things you will want to discuss before diving in!Another thing you could consider, is maybe your buddy brings 75% of the down payment/rehab costs to the table and you cover the remaining 25%. All equity and cashflow from there out is then split 50/50. He brings more money, you bring the experience, you split everything 50/50 after that. This may vary based on the initial price of the property and how much time you plan to spend managing the property.Keep us posted with how you decide to proceed and how it works out!Good luck!

Matthew Irish-Jones · Answer

@Elliot Saks I think you had it right the first time. Offer him a fair interest rate on his money and pay him off after. The other solution is overly complicated and doesn't make a ton of sense. Will future Capital contributions be split the same way cash flow is going to be split? What if you take 75/25 split on cash flow and he can't come up with 25% for a broken main line in 3 years?Clean and simple is the way to go!