How to Structure Partnership - With BRRRR expert and semi-newbies

Question

I along with my partner/sibling (semi-newbies) are looking to propose a partnership with a BRRRR expert we know. We are semi-newbies to BRRRRing, I say this as we do own 3 properties and have done all sorts of construction and rehab to them but never really gone through the whole process of BRRRRing but we do understand it and have the knowledge to do it, just have not done it. The BRRRR expert we know has done 20-30+ BRRRRs and has all types of connections in a different physical location/area than we do. The BRRRR expert is looking to go the next level of large apartment buildings/complexes and has voiced he/she does not have enough time to continuing BRRRRing as well it does lock up his/her money to go after these larger deals. We, the semi-newbies, are looking to take this over for the BRRRR expert as we would love to hone our skills more and get more experience BRRRRing as well as of course own more homes but obviously at a fair partnership for both sides.

We are looking to propose a few business partnership deals/plans to this BRRRR expert and are curious if anyone had any experience or thoughts on what to propose? So far these are some thoughts and questions we had:

1. We have the funds, so using the BRRRR expert and his/her connections we would buy a house and BRRRR. We would split the house ownership 1/3 each (BRRRR expert, myself, and my partner/sibling) as well as the rental profits 1/3 each and then continue to keep BRRRRing. No money out for the BRRRR expert, just time mostly upfront and use of his/her connections. Later on, it will be a lot less work or almost none for the BRRRR expert. Should it be less than 1/3 for the BRRRR expert or more?

2. Similar as number 1 but instead of owning 1/3 each, we would pay the BRRRR expert out their 1/3 of the house's ARV and the house and rental profits would be owned 1/2 each by us (myself and partner/sibling). This of course would cut into our nest egg and would limit the capability to BRRRR. As we would be paying someone out but we would own the house and it would keep things the cleanest as we already have our bank/business setup for us 2 already and not the BRRRR expert. Same questions as above, should it be less than 1/3 for the BRRRR expert or more?

3. Another thought is just a flat fee or percentage of the house price. What would potentially be a fair price to pay?

Any thoughts and any other suggestions or ideas would be appreciated! Thank you

Drew Sygit · Answer

@Daniel L. maybe do the first one with them, then you can move to your own deals.

Have you asked them what they want? Often it may be better than you are thinking:)

Cliff Benner · Answer

I understand it is stressful and terrifying but I have to agree with the other comments. You shouldn't give any equity, if this person is in your network they should just be doing this to help build you, if they are going to do some part of it where you can dump those issues on their plate while your plate has other issues then yeah split it fairly but it sounds like you are going to purchase the food, cook the food, plate the food, and all they will do is suggest where to get it, what recipe to use, and how to garnish it, all of which you can research on your own and learn from doing.

At most, agree on a flat consultant fee, pay them that once or however often they help you connect or answer your questions and split the equity between the people who do the real work. Again, if this person is in your network then maybe coffee or food. Approach them on taking over the part of the brrr you hate the most or bring in the money then give them equity for that.

I would love to hear what you choose to do.

Good luck!

David M. · Answer

@Daniel L.

Oh, so you aren't even in the same area a you are used to? hmm..

Well, your first three are all just "connections." I'd pass you referrals / mentions to any of my contractors / realtors/ suppliers for free --- I do it here... Other investors and vendors in my area do the same. So, maybe this "expert" is just more enterprising than me...

I'm still a little fuzzy on the "full brrrr experience." To be blunt, sounds like a "crock of ****." You could have a deal that requires "light" cosmetic work (just pick it up cheap) or a deal that requires you to gut it back to the studs and subfloor... Just choose a deal that you are comfortable managing the rehab. Or, one that is a little more than you are used to so you can learn about the additional work/trades. Remember, a lot of this is about doing it and getting the experience yourself. Also, every deal is different --- well unless maybe you are working in some really cookie cutter development or you know the area very well.

Is this person going to be your "boots on the ground?" Are they going to manage the contractors for you? If its just to give you guidance as your go along, I'd personally, actually do it for free. I know there are some "experienced investors/flippers/whatever" that basically their time/mentorship/guidance is free. You only pay if you use "their" people --- basically, I think if you want to use the expert to GC a part of the job for you they take a GC fee.

Daniel L. · Answer

Thank you both @David M. and @Joe Garretson for your responses. We really appreciate you taking the time to read through it and your perspectives. You both make a lot of sense to definitely go more towards a consultant fee or flat fee rather than part ownership.

To better explain the BRRRR expert would provide us mostly connections and a fast track experience for us but below we list it out briefly

1. Wholesalers connections

2. General Contractor and contractor connections

3. Property Management company connection

4. Full BRRRR experience (as we have not done it all the way through so figured this experience might be worth giving part ownership)

Overall the expert has everything set up and working well in their area (that we have no connections in) so we could potentially just jump in and start being successful and to see how a whole BRRRR operation is run. We don't feel we have done a perfect job rehabbing and buying homes for our 3 homes that we have, so our concern I suppose would be not BRRRRing well and we figured a mentor or someone more experienced would be quite helpful. Although, it seems offering a deal where the expert gets part ownership and does not put up funds/money doesn't make a lot of sense or is not fair as you both mention. Especially since we do have some experience and are mosing right along, as David put it. Learning and making some mistakes might be best in the long run anyway as we will get better. We appreciate the input and will talk about some sort of consultant fee or option with this expert.

Do either of you have a suggestion for a consultant fee or percentage fee of the final profit?

Again, I just want to thank you both for your input and help.

David M. · Answer

@Daniel L.

No reason to provide equity benefits when this "brrr expert" isn't putting up anything. Since its all your funds, its all your risk and reward.

What is the brrr expert providing? Why not just pay a consulting fee... If this person is too busy to brrr and doesn't want his money tied up, then he is useless for brr at this point and/or moving on in his/her investing life.

If you have already done your own construction and rehabs, then just do the brrr yourself. If anything this is a natural progression. You've learned from homeownership, either your own or via rentals or just in your day job, about construction/rehabing. Now, just put it all together and do it, being the rehab/construction, on some other property... From what you've posted, sounds like you and your sibling are mosing right along... Not trying to sell you on anything, but you sound fine. Is there some other concern?

Joe Garretson · Answer

I'm curious what this BRRRR expert is providing for you? It appears from your scenario it's really just a blanket of comfort as you and your partner work through deals? Essentially a consultant of sorts?

I'm wondering if you really need this expert involved at all?

If I've heard it once on the podcast, I've heard it a thousand times; jump into a BRRRR deal you've done the math on and feel confident. You might succeed, you might fail but you will surely learn.

If you absolutely need the comfort this expert will provide, offer them some small percentage of the final profit for consultation to review your numbers, help you select a deal and get your plan in place. They have some skin in the game at that point to help you succeed.

How to Structure Partnership - With BRRRR expert and semi-newbies

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