Investor worker profit split

[Jordan Bentz]

I am wondering what a good profit split would be for one individual being the investor and the other individual doing all of the manual work. 

The investor will pay for 100% of the house and renovations for the house to be completed and the worker will invest 0% of the money, and just work on the house. After the house is sold and the initial money is paid back to the investor, how should the profit be split?

[Gilbert Dominguez]

First the investor is the one taking most of the risks. What is the worker's experience in fixing up houses and making sure that everything can and will be done within established budgets? Does the worker  know how to prepare accurate and realistic budgets? 

Does anyone know how to establish a realistic ARV(After repair value)

If you bump into cost overruns there may be nothing left to split and the investor should be able to recoup 100% of their investment period. If you cannot make sure the investor putting up all the money will not lose his or her money then the project is not worth doing , period. 

When you say worker I am assuming this worker is not a licensed contractor and does not have liability insurance. It is one thing to be a project manager and another thing to actually do the work. Allot of people under estimate the knowledge, ability, and experience required to work on houses and house systems such as electrical, plumbing, framing and or addressing possible structural issues, possible issues with foundations, drainage etc. etc. 

Does anyone understand marketing and building for the market in your area so that you know not to over improve the property. In other words you want to improve the building only to the extent that matches the existing market and not over do it, over spending money which you will not recover at sale. 

This is one way you might calculate. First what can the investor with the money do with his money?. He could be a hard money lender and earn let us say 9% on his money taking on very little risk by letting others manage his money for him or her and getting them into only deals with very experienced builders. So off the top the investor should get 100% of his money plus at minimum 9% interest or whatever interest is determined and agreed to between the parties. After that has been taken care of then and only then will the remaining proceeds be split in order to provide the investor with an incentives for taking on what to me are significant increased risks. I will mention about the worker is just a bit. 

Let us for the sake of argument assume we are talking about a qualified and experienced worker. What would normally be their hourly earning capacity or rate. That is the true value of the work. The investor could simply hire anyone he wanted to do the work and pay them either an hourly rate or a contracted rate in which case of course he or she would be dealing with experienced licensed, insured, and bonded contractors. I am assuming in this case we are not talking about someone who can offer the investor(money-person) this protection. 

I have seen these kinds of arrangements many many times and by in large a very high percentage of them end very badly with everyone losing.

You want to view this as a business that will get established and continued rather than thinking of it as a one time deal but even if it is a one time deal is should be structured with the money investor having the right to replace the worker anytime things appear to be going wrong. This can include schedules not met, budgets not adhered to, inspections not passing etc. 

You have to have a realistic plan that shows what the actual costs of repairs to be made will be and do your best to stick to it. The realistic After repair value of the property, and the marketability of the end product should also be assured to the best of your ability.  

You should also have a marketing plan and if possible start to line up a list of potential buyers. Will you employee the services of a real estate agent for the sale of the property and if it will be a buy and hold property ask between yourselves. Will the investor simply pay the worker off of if the title will then include both parties and determine what is equitable as a rent split. 

Now for the worker's interests:

In this case the so called worker mentioned here is also taking on added responsibilities because he or she will be responsible for paying the money investor vs simple employment for a construction company. When you are simply an employee the laws says you must and will be paid. However in this case the worker may end up working for nothing over an extended period of time. There is nothing that will prevent you not getting paid unless you already put that in your agreement. 

These are some of the things I would think to include in my agreement. First, investor to receive a predetermined interest on their money like 9% or more(hard money). Two, worker to receive periodic payments based on a predetermined hourly rate. You do not want to be a worker subject to working for nothing, having to starve yourself or otherwise put yourself at risk of not being able to handle your ongoing living expenses. 

There are so many things that at first will not be accounted for in your plan such as fuel expense, vehicle wear and tear and vehicle insurance costs. Tools etc. Your accounting systems needs to address any and all issues that involve actual expense items. What to do with left over inventory of supplies for example is one area allot of people miss in their agreements. 

Will you form a partnership, an LLC or a simple lender/borrower relationship?

A formal and documented structure can be a complicated matter and you may think to hire the services of a professional to assist you structure your arrangement. 

I have over many years worked in such arrangements and I can tell you that there is allot to think about in order to make this kind of arrangement work out beneficial and truly profitable for all parties and I will say again. " A very high percentage of these kind of arrangements fail miserably and everyone involved ends up getting hurt".

Hope this helps a bit.