Partnership, profit splitting and overall deal advise please.

[Jonathan Sowinski]

I am looking for some ideas/input on how I might want to approach our most recent deal. We (wife and I) are looking to bring in a partner and are in the early stages of fabricating the deal regarding investment, profit split and weather there may be a more beneficial strategy to the whole deal.

Property Details:
Purchase = $50,000 (cash)
Rehab = $35,000
ARV = $120,000
EGI = $19,000
Annual expenses = $9,500

The deal:

I bought the property thinking it would be a quick flip/wholesale deal but I now want to hold it (the above valuations are conservative and I hope to realize better returns). Anyway, I am “all in” with the cash purchase and need to fund the rehab. I began pursuing construction loans and wasn't crazy about having the holding costs during construction as it will be our first major rehab and it woulnt be producing anything for a few months. So I reached out to a potential partner and he is interested in the deal and as a buy hold as well. He would be an equity partner as he is from out of state and I would be handling the rest of the deal (rehab, management…). Typically I do some of (most of) the work myself but am thinking that it may be better if I GC’ed the job in order to keep things a little simpler (unfortunately, knowing myself Ill end up getting into something and want to make sure we accommodate for that).

We haven’t spoken in detail about structuring things so I thought I would float it here and hopefully some of you will have some advice.

So far I was thinking about the following:

Form partnership, transfer title to partnership, he invests $42,500 (covers rehab and buys the $7,500 of my stake to put us at 50/50 equity partners). We rehab and cash-out refinance after seasoning (hopefully at 70% of ARV, $85k to pull both of our equity out). I then receive 10% of collected rent for management and we split the remaining profit 50/50.

What I am interested in is first, does this sound like a fair deal? Second, what might be considered fair compensation paid to me (if any) for GC’ing and initial effort put into the deal (finding and closing on the property)?..and what if I did put some sweat equity into it? Is it most reasonable to identify an hourly rate? Lastly, if you see other approaches that may be more beneficial to the deal as a whole I would be most interested.

Thanks in advance.

[Craig Rismiller]

I am not sure I will hit on all of your questions but here is a start...

In general I am not a huge fan of partnerships for buy and hold rentals, unless one party has something you really need (credit, cash, local presence, etc.). In my experience partnerships work much better for quicker exit strategies (flips or repositioning of a property).. Rentals are longer term investments so if you go that route make sure you have an operating agreement in writing, have similar expectations on investment horizon, both parties are okay applying for and being personally liable for the mortgage, etc.

Fair on a rental property will vary but at the least you should get a ~7 to 10% management fee on-going, a $3 to 6k GC fee (GC would charge a 15 to 20% mark-up if you outsourced) and maybe even a lower cash contribution to still have a 50/50 equity split ( if your numbers are right your partner is getting 50% of your immediate equity gain of $35k).

It sounds like you have cash ($50k to buy) and the experience to rehab. Assuming you have good credit to do a cash out refinance, I would consider doing this deal on your own. Would your friend consider giving you a $40k construction loan for say ~12% in exchange for the 1st deed position. You could then be 100% owner, rehab, refi, and rinse and repeat