Is this a fair split/arrangement?

Question

I have been discussing with a friend a potential arrangement for buying a multi-unit property. I live far away so we'd been talking about me putting down 67% of the down payment with him putting down 33%. He would handle all property management and buying of the property (with my input and consent). Then going forward we'd split the net profits and equity 50/50. We'd be buying in the range of 550-650k range with a 25% down payment, so I'd be putting down 16.75%. What are your thoughts?

Russell Brazil · Answer

How about 50/50 and you just hire a property manager

Michael Smythe · Answer

@Jim Bo biggest mistakes investors make when doing business with friends is NOT treating it like a business arrangement.

You'll need a detailed partnership agreement covering buyouts, capital calls and what happens if one of you dies.

Why would you pay him while he learns property management? You don't think he'll make costly mistakes on his learning curve?

Robert Rixer · Answer

A mistake I often see with these kinds of structures is it works when the deal goes as planned but when things go badly, those scenarios aren't taken into account. What happens if he mismanages it and you end up losing money - do you split losses 50/50 or do you get your capital returned 67/33?

A better arrangement would be, paying him an acquisition fee, a property management fee and then splitting profits pari-pasu to your capital contributions. Or if you want to get to 50/50, he could pay his acquisition and pm fee to you until he hits 50% contribution.

Many ways to slice and dice it but the key is to keep incentives aligned whether the deal goes up down or sideways.

Bill B. · Answer

Basically sounds like you’re putting down an extra $20k for…

Him choosing the property (I assume/hope it’s really you both choose or it’s actually to his advantage to pick it, so this I feel can be disregarded.)

Him running all the property management. 1) feels like he might get sick of doing all the work and forget why he’s doing it. 2) you’re paying $20k more to not have to do it so how long would it take for property management fees to reach $40k? (Your breakeven point) 3) is he a qualified as a professional property manager? (Screening quality, fair housing act compliant and non-discrimination) 4) and finally, if you’re splitting the equity you’ll really get 1/2 of the 16 vs 8% downpayment (4%) back when it’s split. (12.5% each.).

I think I’d pass. I think you’re overpaying for the management and even worse your partner is going to feel like they’re behind under paid. I’d do the same deal but own 2/3rds if my partner can’t afford to come up with half. Then I’d hire a professional PM, pay 2/3rds the expenses and keep 2/3rds of the income.

Alternatively you could do the same as above except you borrow your partner the other 4% to make you 50/50 partners but use a pro PM. ALSO, have a buy out plan. When one of you hates the deal, needs the money, or has their life change you need a game over plan. You either say you both have the right to say it’s time to sell or I prefer one partner who wants out give a “buy or sell price”. A price that they will pay for the other half or sell their half, that way neither person can feel ripped off. Good luck.

Alex Hunt · Answer

As a mortgage expert, my advice would be to ensure the financing aligns well with your plans and goals. It's important to explore your options thoroughly to find the best fit for your investment strategy. What kind of loan are you getting? I assume a DSCR?Additionally, consider consulting with legal and financial advisors to solidify your agreement and protect everyone involved. Like others have mentioned treat this as a business arrangement. Here to connect if you'd like to run some numbers'

Evan Polaski · Answer

@Jim Bo, I would generally agree with all the posts here.  I can't say if this is a go or no go, because too many details are left out.

As others noted, the only thing I can truly comment on with the details provided is: make sure every scenario is clearly discussed and accounted for in your partnership agreement.  As others noted, what happens when you need to infuse more capital?  What happens if your friend moves away too, and you need to hire a manager?  What happens when one person wants to sell and the other doesn't?

At the end of the day, what is fair is what you and your friend can agree to.  If you are good with the outlined arrangement and he is too, and you are both protected in your legal agreements for many of the "what if's", then it is fair.  There is no uniform way to structure these types of deals.

But beyond this proposed percentage splits, you and your friend need to look at actual numbers.  How much is he actually making each month for doing all the work?  My first thought is: I wouldn't take on all that work to maybe make an extra $100/month over my true proportionate share of profits.  Now if it is more of a flip and the equity payout is both large and quick to come, that could change it.  But percentages are meaningless.  I know what I value my time as, and so I would want to see what I am really getting paid for all my work.

Christen G. · Answer

I hate to answer a question with questions but there are so many variables! Have either of you done this before? Can he actually PM or should you hire a professional - that will change margins. Do you have this money to spend? What are the exit strategies? I agree with the above on the buy-out plan and would add - get an insurance policy to boot. Sounds fun regardless - just run good numbers! Good luck!

Is this a fair split/arrangement?

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