Patrnership deal? should I take it or leave it?

Question

I was offered to partner up with a friend of mine, his proposal to me was.

We as partners would build small 500 sq ft one bedroom units/ duplexes triplexes etc.

1. He would put up all the capital.

2. Give me an hourly wage (so I can do it full time) plus 20% of the profit.

3. If I wanted to put up capital my % could increase.

4. I would be the contractor to build the units

Goal to build super efficient one bedroom units and control the construction cost. By contracting it out ourselves and instead of hiring companies to do the work, we will hire the professional's for each trade. I have the ability to pull permits and do the electrical, plumbing and HVAC my self. and I have enough construction contacts to cut out the business and hire the tradesman my self.

Mike Jury · Answer

Really nifty ideas create a lot of interesting memorabilia, but often no profits.  Before diving into this kind of venture, understand the market.  Are there many small apartments in demand in your area? And what is the full financial picture for profitability.  You might get paid, but will the deal make any money? If not your interest in the deal may cost you more than you make in carrying or holding costs.

I think you got a lot more homework to do before jumping into this venture.

Mark Brogan · Answer

@Luke Mcclure if you decide to do this,both of you should spell out the jobs that each will perform during construction and put it in writing good luck

Douglass Benson · Answer

25% of my units are one bedroom and I wish it was less.  Make sure you completely understand the market for one bedroom units.  In my world that is where 75% of my vacancies are.

Darrell Shepherd · Answer

Whats the exit?  He puts up the profit, pays you an hourly wage, then 20% of what?  He going to pay you 20% of rents?  "profit"?  If profit, how is that determined after reserves and depreciation, etc.   Like has been said, you want to create an LLC that you are 20% owner of, he funds the LLC and the LLC pays you a wage.  That works, but the plan is circumspect from the get-go.

Renting out small one bedrooms usually sucks.  If you are in a hot area full of twenty something professionals then maybe, but the people that rent 500 sq/ft one beds outside of expensive areas are not exactly ideal tenants.  I cant imagine why anyone would target that audience with new construction.  Whats your build cost and rent rates?  Does it even make sense to do?  Like Mike said, its all about the numbers, not "look what I own" and you really haven't told us anything about the dollars, presumably because you haven't worked through them.

He may be looking at the trend of millenials to downsize and want to capitalize on that, but (and I'm not an expert on this) I'm guessing that's only the case in high density areas.

As far as the terms of the partnership, it would depend on your hourly wage and expected profit.  Generally most arrangements would be you do the work, he brings the money and you guys split it.  If he's paying you a wage, then absolutely your % of the profits should be significantly reduced.  Hard to say if 20% is fair without the rest of the numbers, but it doesn't seem out of line.

Luke Mcclure · Answer

Thanks for the input, and great observation. I am definitely going with the reno option instead.

Leon Moody Sr · Answer

Make sure the project has a firm foundation in regards to demand for 1 bed room units in the area. Also if he is willing to pay you your an hour wage plus a  percentage of cash flow, I would consider it. Just make sure he has a back up plan if things don't go according to plan. Make sure the hourly wage would substitute what you are making at your current job. It sounds like a great opportunity!!

Luke Mcclure · Answer

Good question  @Clay Smith

He wants to build super efficient units. I will research the Reno opportunities. I think he has a romantic idea about building super efficient units to cut down on utilities.

Jonathan Towell · Answer

Can you make the business work without a partner? Only partner with someone if they bring something to the table that you do not have (e.g. capital).

If you do the deal, put it all in writing. Make it official with an LLC or other attorney approved entity.

Clay Smith · Answer

Profit from the rental income? Why build instead of reno?

Patrnership deal? should I take it or leave it?

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