profit sharing in partnerships

[Erin Onsager]

I've been investing in real estate mostly in Denver (single family homes).  I've been lucky in that I now know the market incredibly well, and usually net $1,000-$1,500 per month per property right out of the gate.  I've recently shared my successes with family and a few close friends and I think I've been doing this long enough and have proven myself that now a handful of people have expressed an interest to join in and also make some money (I don't blame them!).

Previously, I formed a partnership on a property with my cousin - it was my first partnership and I was trying to get her into real estate and take her under my wing, so we did a 95%/5% split and did everything pro-rata.  This was a great deal for her as I did all of the work and she just reaped the financial benefits.  It was less beneficial for me as all of a sudden, I had to pay more to form a partnership, and then pay more in taxes (to file a K-1 every year), and was spending slightly more time keeping the books and paying her her fair share every month.

My question is - going forward, I'd like to be open to partnerships with friends, family, and maybe even strangers, but I want to make sure I'm getting paid for my expertise and my work.  For those of you who are in partnerships or have created partnerships, how do you structure your terms?  I've contemplated doing a promote - where both partners get a pro-rata return on their investment until their original equity is returned and then having 60% go to me and 40% to my partner.  I want to be fair to those who wish to invest with me, but I also don't want to sell myself short and over-extend myself as I realize that the knowledge that I've acquired over the years of investing is valuable.

Thanks in advance!

[Nathan Gesner]

You can do a percentage split, like you mention, but you could also do a simple 50/50 split but then pay yourself for your labor. You can pay yourself for finding/negotiating/closing the deal. Pay your self a 10% monthly management fee. Pay yourself an hourly wage for bookkeeping. Pay yourself a sellers fee when you sell the property and cash out. Another simple option is for you to put in 10% of the purchase price and your partner puts in 90% of the purchase price, you do all the work, and then you split the profit 50/50. It all depends on the amount of work being done and how you want to be compensated.