Splitting Profits with Partner on Rehab

[Kyle B.]

I have a financing partner for potential rehabs I plan on doing and wanted to get BP's input on how to structure the profit split of these deals.

Some background information - I will be doing all the work from start to finish, so my partner will essentially be "silent" throughout the entire process. Given this structure, do most people split the profits 50/50 (half the profits for providing the capital and the other half for the work involved in the deal)? I plan on contributing a significant amount of my own money into these deals as well (at least 25% of the total costs), but wanted to see if the 50/50 split is a good base to start from when determining profit splits.

Is this in line with how other people have structured deals?

Thanks,

Kyle

[Will Barnard]

Originally posted by Bryan Hancock:

I think you'd need to list out the specifics of a given deal for someone to comment intelligently. Talking about things like this in the abstract is hard because it is hard to see who is delivering value and how.

This is true and I will add, each party who posts will have a different perspective (likely bias) based on their regular role. In other words, those who have the money will state that their share should be higher and those finding the dwals and managing them will state that their share should be higher.

In an effort to accomodate Bryan, lets use one of my deals i have in the works as an example.

Acquisition price is $1,150,000
rehab is $300,000
ARV is $2,400,000
Lets also say that resale costs will be $150,000 and holding costs (not accounting for any leverage costs) will be $25,000. We will also say that the total hold time will be exactly 6 months.
The spread based on these numbers above comes out to be $775,000.

Now, I found the deal, will manage the deal, and sell the deal. I will also guarantee that the money partner does not lose a dime and do so with a personal guarantee of which I actually hold assets with equity to cover any potential loss.
Lets also assume that both the rehab investor and the lender are both equally saavy in RE, but the money partner wants to remain completely passive, make no decisions on rehab or anything, just wants a good return.

Based on what Bryan laid out, the money partner would get $620,000 (80%) for a total cash investment of $1,450,000 which is a 42.8% return. Based on 6 months, that is an 85.5% annual return. Return for rehab investor partner is $155,000 (20%). Now, the rehab investor put up zero dollars so many can and would argue that is one hell of a return, I would argue that I took on quite a risk just to make $155,000, not to mention my 6 months of time which i value greatly.
Even if you made this a 60%/40% where I receievd 40% ($310,000), I would not do the deal under such terms and here is why: Without me, this money partner would not have the opportunity to be in this deal (yes Bill, he could find any RE agent to easily hunt down a deal with same spread, hire a GC to run the deal, and hire another agent to sell the deal and make all the money, this again assumes he/she cares to take on such an endeavour of time and risk) and would not have their funds guaranteed, nor would they have the ability to be 100% passive.

Now, let me go on the flip side just to be fair on non-bias as i too can be on the lender side. I am the lender and at 50%/50%, I would do the deal so long as my money had a minimum return guarantee. So long as the numbers hit as posted, i would make $387,500 on $1,450,000 investment, do so in 6 months, and be 100% passive (this would ONLY be done if the investor was as experienced as me as i did state in this example to keep apples and apples here.

So, in summary, many have argued the 50% split is not how it should go and under the circumstances I have laid out, i believe it is the most fair.

- Will Barnard