Fair terms - how do you split with money only partners?

[Patrick Menefee]

There are a million examples and a million different answers, what has worked for you? Or what hasn't worked?

For me, I have a partner interested in investing with me on a property. I was talking about another REI deal out of excitement (as I do) and mentioned this one as well when he asked if I was looking for an investor. Outside of owning his condo, he doesn't have real estate experience or expertise, but was looking to get a return on his money. He's also out of state (in Chicago, I'm in Charlotte)

The property is a buy-and-hold deal that would require $48k cash up front, and after all expenses would net $416 in CF for a COCROI of 10.4% (on the conservative side) with roughly $55k in equity. Traditional financing would be used, and because we're both contributing to the down payment we'd both be on the mortgage. 

Financially, we'd split the equity, cash flow, expenses (except down payment, see below), everything 50/50. We'll be using a property manager and I won't be managing the tenants directly, but due to proximity and his lack of experience/expertise, I'll be doing nearly all the work now and going forward. This includes everything required to close the deal such as finding it, arranging funding, etc., and everything thereafter to include coordinating immediate updates/repairs, finding and bringing on a good property manager, and really managing anything needed with the property. He'd essentially be providing up front cash, his name on the mortgage, and an opinion on execution.

I'm leaning towards suggesting either a 60/40 or 70/30 split on the up front cash, which would essentially mean that he's paying between a $4,800-9,600 premium for me doing the work. Does this seem like a reasonable agreement? Do you think I'm over/undervaluing roles?

Looking forward to hearing what others have to say!

[Account Closed]

It appears you don't have a lot of experience with partnerships. Being involved in a partnership is more difficult to manage than a marriage. Regardless, of how much planning you do and even with what you think is the perfect partnership agreement there is almost always serious problems and the same pain as getting a divorce. Especially, since you said your would-be partner is only a brief acquaintance.

I think most states have very specific legal requirements. The IRS also has many requirements for tax reporting.

When you have a partnership you have to answer for every penny spent. This requires a lot of paperwork and possibly arguments should the deal go south, or should the ROI not meet expectations.

I did about 20 partnerships and everyone ended in a disaster. Many partners were paranoid and they could not trust decisions, or your accounting. Partners promise to stick with a deal for the long haul and then they want out because they decided they wanted to use the money for something better like for a new car, or whatever. This means you will work your butt off to get rid of your partner while he complains about it taking too long.

In your situation, the best thing to do is a syndicated partnership where you are the general partner and your acquaintance is a limited partner.  Again, the problem with syndicated partnerships is there are many legal requirements and the cost for an attorney makes a 1-house deal not feasible. Over the course 10 years you will have more than 1,000 legal forms and accounting records.

As for the fair percent to give your partner, my answer is 10% to 18%. I derived with this number by comparing with the average ROI for syndication partnerships for limited partners who are not active in the business. Also, since your partner is not active in the business you have to consider what he would earn with his money by investing in any other passive investment i.e. cd's, stock market, etc.

To prove a point, if you are good at investing, willing to do all the work and pay 40% of the profit you can invest all my money and I will retire. With that payoff you should have millions of investors throwing their money at you.