How should I my partner and I split this deal???

Question

Hello All,

A silent business partner and I just signed a 5 year master lease (with an option) for a duplex in which we be paying $1200/month to rent from the owner and we will be subletting for $3300/month.  Some specifics:

*We were required to put down $12k in option deposit monies and also an additional $7500 for security deposit and some improvements.

*The $12k came from our company checking account (we have another rental together) and the $7500 came from me.

*I found the deal and will be managing all aspects of it. He is 100% silent.

*My partner did contribute 1/2 of the option money (6k) via our other rental property investment proceeds.

*Our LLC signed the lease, which he would be responsible for as well (FYI, the LLC only has 1 property in it, which is currently 40k under water, so essentially has no assets).

Looking back on it, I easily could and should've done this deal on my own.  But it's too late for that.

My question is this:  How should we split the cash flow?  I have asked 3 people I respect with knowledge of the situation.  2 out of the 3 said I should get 75% and my partner 25%.  The other person I asked said that sounded like a little bit too much.

I want to be fair to myself and to him and that's why I would love some unbiased opinions.

What say you?

Bryan O. · Answer

You put in 70%, so you should have 70% equity. Then figure out a fair way to value your time managing. I would say 5% of gross (you are self-managing because it's cheaper than getting a company to do it).

Otherwise, I like @Brian Mathews idea. Get your money back, then it's a 50/50 split, +/- whatever you work out for you as the manager and him as the silent.

Brian Mathews · Answer

Its really simple and it can keep it clean.   Why don't you keep all the proceeds after all monthly bills are paid until your $7500 is returned to you.    Then pay yourself a market value PM fee or whatever your day to day duties would be in regards to this property.   After that split the proceeds 50/50 or 55/45 or  similar percentage to keep feelings from getting hurt and write down everything and sign it so there are no questions later.   The only ship that won't sail is a partnership.

Che Chiu Wong · Answer

@Will Gaston

We are very similar too.  For some of my properties, I hold with my long time friend too (even some real estate investors may think it's a bad idea, I personally think it's good to do business with good trusting friends rather than strangers).

Numbers / percentage will be per my earlier comment.  Charge separately and in line (I put it slightly below) with other service providers (e.g. management fee, bookkeeping fee).  People charge around 7% gross rent for management fee. Bookkeeping fee charges around $150-200/mo (assume not that many transactions).

Che Chiu Wong · Answer

@Will Gaston

Before talking about numbers, have you spoken with your partner about that you feel you take in too little?

Just an idea, instead of changing the profit split, you treat yourself as a service provider. (ie. you charge e.g. maintenance fee, bookkeeping fee etc.)

The benefit of this is that it is much easier to come up with a concrete number (e.g. looks at other service provider for prices).

Garth Gissel · Answer

Personally I wouldn't factor the PM fees into the equation. If you didn't do the work you have to pay someone else, so that portion is irrelevant. Only deal with the Net Cash Flow side of it. $1770 x .71= $1256   His take is $1770 x .29=$513. He will have 102% return after 12 months. I think he will be fine.

Garth Gissel · Answer

Sounds like you should have put that in the deal up front.

Be that as it may; I would think you should get the going rate of local Property Management companies for managing the property. From the remaining cash flow you put in about 71% of the required investment, you could approach it from that point of view.

Will Gaston · Answer

Thanks @Che Chiu Wong

Will Gaston · Answer

@Che Chiu Wong No, not yet.  He is very reasonable and I think he'll agree with whatever I propose as we trust each other and have been long time friends. I just want to make sure that I am being reasonable as well.  I think the best way to do that would be to ask other investors and see what they think.  Do you have any number/percentage suggestions on something like this?

Will Gaston · Answer

Okay that sounds reasonable @Garth Gissel. It seems that type of split ($1500ish to me/$500 is to him) is what 3 out of 4 have told me so far.

How should I my partner and I split this deal???

Most Popular Reply