Family Partnership Equity Structure

[Jerry Mical]

Hello BP!

I am a new investor, though I have been perusing the BiggerPockets forums off and on for about two years now and have listened to 30+ BP podcasts.

My family and I have finally started to get the gears churning on buying our first investment property and I wanted to see what BP thinks about the equity structure we are debating on between our family members. I understand and read many articles of the pros and cons of partnering with family members and have ultimately determined we will trudge forward while trying to put in as many processes in place to protect our close family bonds while also protecting our investments. The equity structure discussion below is to try and be equitable to everyone for capital contributions/work contributions while also encouraging each partner to continue growing a portfolio of real estate investments.

Quick background on each member:

Parent: Has plenty of capital and wants to invest it; does not have the desire to be out finding deals, financing, rehabbing, etc. and lives in a small market with minimal real estate activity

Sibling: Has limited capital, time is somewhat tied up in multiple endeavors though sibling does want to provide some help in the day-to-day as time allows. Market will change as current job moves around to different states year-to-year. Best description is limited capital, limited time 

Me: Limited capital (more limited than sibling); lives in the hottest market (Charlotte) and would do most of the grunt work, research, deal finding, financing, etc.

Equity Structure per deal:

- 10% base for all three

- 23.3% for either capital contribution or performance of deal work

- When an investment is sold, the original capital contributions would be returned to contributors and the equity structure would determine the profit sharing

We would setup an LLC to hold investments of similar equity structures

If one partner does not participate in either capital contribution or performance of work, the other two partners would split the 23.3% unclaimed

Quick Example using basic number assumptions:

Parent puts in $50k capital to purchase $150k (w/100k mortgage) property and little time/work – 10% base + 23.3% + 11.65% = 45%

Sibling puts in $0 capital and little time/work – 10% base = 10%

I put in $0 capital and majority of time/work – 10% base + 23.3% + 11.65% = 45%

Parent puts in $25k in rehab costs

Property is sold for $250k - $100k mortgage is paid off, parent is returned $50k capital and $25k in rehab costs – profits of $75k are split $33.75k Parent, $7.5k Sibling, and $33.75K Me

Ideally, all three will be involved in all deals but this won't be our first or only obligation so there will be times when that won't be the case. I wanted to see if others in the BP forums have had similar experience and am interested to hear your advice on how to best achieve our desire to be equitable but to grow a portfolio together. I am sure I am overlooking some big points, so please give me your criticisms and feedback. Thanks!