Advice on Partnerships and sweat equity

[Stewart Wyne]

I posted this in a different section but didn't get many responses. Need some advice on partnerships.

I've had some success in SFD re investing ($2 million portfolio). Now I've got family and peers that want in on the game, but want me to do all the work. Find the deal, close, manage, etc etc. Everything. Which is fine.

How much equity share is a reasonable amount in sweat equity if I have a silent partner? How is that typically structured? Can you give me some examples?

Example 1: Say we buy a 500k house, 100k down payment. How much can I ask them to put down if we are going to maintain a 50/50 ownership structure? 70/30? Or what if they are putting up 100% of the financing. What sweat equity is appropriate? 20%?

Example 2: I've thought about doing a large sweat equity share on the back end, or exit. So, we do a 70/30 split on down payment, and we maintain a 70/30 split on cash flow. But once the investor has been made whole (got his 70k back), then it shifts to a 50/50 profit slip. I realize that's probably not till we sell the place, but you get the idea. Would that be reasonable or attractive for an investor? I'm totally self funded so far so not sure whats appropriate, and I want to have a structure that will be attractive to other investors. 

[Austin Fruechting]

You can structure it in any way you want and in any way the investors would want. 

Lets assume the investor puts up all the cash. On large scale deals (syndication sized) the investors get a preferred return of 5-9% off the top and then 70-80%. The syndicator gets 20-30% plus asset management fees and other fees for closing.  

On small deals 50/50 with no preferred and no asset management fees or other fees can be done.

Mid sized deals I would say the investor would get 50-70% for putting up all the cash depending on how you structure it. If you do a preferred return and no asset management fees or other fees, you can go closer to the 50/50. Say you do a 6% preferred to the cash with a 50/50 split after. If it's $100k cash, they get the first $6k and any remainder is split 50/50. If it makes $20k they get $6k plus 50% of the remaining $14k. So they'd get $13k and you'd get $7k. That's the same cash split as 65/35 split. 

You could do a higher preferred return, then a matching amount to you, and then split the remainder according to a split. So say it's $100k cash in. They get 10% for $10k, then you get the next $10k, and split the rest 50/50. That gives them a higher guaranteed but ends up 50/50 overall if it's really profitable. 

Or you could do 75/25 split on the cash for a straight 50/50 split of the deal. 

There are endless options. What's acceptable for the investor and you will be very deal dependent. I think if you target a 15-20%+ IRR for the investor based on a 5-year exit that's a good deal for them. It can be structured in any way to make it happen. On your side you'll have to figure out what makes it worth to you for your time for the deal as well as the time of dealing with investors.

You can split the cash flow and the equity different as well. Say you need 50% of the cash flow with no preferred return for the cash to make it worth your time. But maybe that doesn't satisfy a high enough IRR for the cash investor. You could split the cash flow 50/50 and the equity 75/25 so they have more at the sale. Or if your goals are equity and net worth maybe the cash flow is 75/25 but the equity is 50/50.

Again, there are endless possibilities of how to split it and it's all dependent on the deal and everyones goals.