Active / Passive Partnership Contract

[Ross Stegall]

Hi all, I’m looking at investing with a partner and I had a few questions I was hoping the BP community could help me answer. So, here’s the details: My partner will be the passive/ equity investor and will be contributing about 80% of the money needed to buy/rehab a small multi unit rental. I’ll be the active investor, managing the property, finding the deal, and making the deal happen. I’ll also be in charge of any renovations. Also contributing up to 20% of the initial purchase. My questions: 1) Do we have to form an LLC in order to properly/legally document what each person is responsible for and will get from the investment? I would prefer to avoid that and use conventional financing as we both make decent income so we should easily qualify in the area we’re looking. 2) When forming a partnership like this, is all profit/equity typically split based on the invested capital? What are some other creative ways to reimburse for sweat equity? I.e. should I be compensated for managing the property? Can you do a split of 80/20 until the initial investment is reimbursed and then move to a 50/50 split? What are some other creative splits you have seen? 3) We are both in this for buy and hold, but with two people how do you decide to finally sell? Does one partner always have sell authority written in up front? Sorry for the lengthy post, I have done some searching on this and have seen most people saying 75/25 split is pretty typical just want to get some additional opinions. Ross

[Ryan E.]

@Ross Stegall I invested in a flip with a good friend who did flips full time. We did a JV and he had all the control...all we did was sign a JV agreement. I just wired him my portion of the money and then waited. It was the easiest money I've ever made. So in that situation I was sort of on the end of your partner. We split the deal proportionately to how much money each person put in. I only put in 25% so I got my original investment back plus 25% of the profits.

I think ultimately it's whatever you both decide is fair together in regards to how to split any profits/equity. I've seen people do 50/50 all the time...the reasoning being that if one guy has the deals and one has the money then that's fair as you are both filling the need of the other. 

As far selling goes you should probably spell that out in the beginning on the J/V agreement or whatever document or entity you decide on using. I imagine you'd want to be pretty specific. Who can access equity and when/how much, how long to hold initially, when to reevaluate, what to do if one partner wants to sell and the other wants to keep holding etc. etc. Has the potential to get a bit messier than a flip which is a relatively short term endeavor and the primary exit is already predetermined.