Partners, Profit Sharing, Private Money (Friends), and I'm Still a Rookie...

[Grant Brewer]

First off, I have lurked on this site for a while now and have listened to about 20 or so of the BP podcasts since I discovered it and the website about a month ago. So thank you to everyone that has helped me already by posting on the site and taking part in the podcasts. You have helped a lot and you didn't even know it. Now that I am in a somewhat unique and special situation (at least I believe so), I am turning to the best and largest community of RE Investors that I know of. So let this be a part introduction and part cry for help...

Since I was 17-18 I have been interested in RE and starting at that time I saved all the money I could and read/researched everything that seemed worthwhile on the subject. I bought my first place in 2009 while I was in college. Turned it into a 5br, and have rented it out with great cash flow ever since (16%CAP). One year ago my wife and I finally had "real" jobs after me settling into a solid full timer and and her finishing grad school. Since we both agree that RE is a great opportunity and we should put all the money we can into it, we decided to buy our first place and view it as an investment, not just a typical home purchase. We are fiscal conservatives. We live within our means, spend only half of what we make, and both have a relatively high rate of financial literacy. Our view on RE investing is buy and hold. LONG TERM. So, with the money we had already saved and knowing we could now afford a house payment with our new found employment, we bought a distressed property on the edge of town. We completely renovated the thing and boy does it look nice. FYI, concrete countertops are a long process. Proceed with caution.

6 months later we pulled out our sweat equity and with it I bought another foreclosure, this time a complete gut. It was fun. The margins were good. Some might say "great". I had a signed lease a full month before renovation was done. I like. However, I do almost all of the work myself. I have friends and family that are in various trades, so whatever I cannot immediately do myself, I can get help. This house showed me that while I like the work, I just simply do not have the time to renovate an entire house on my own. I would like to keep at least a little bit of sanity as I continue down this path of RE investing.

As I started my next purchase about a month ago, I called on three people to help. My contractor (distant relative), one of my best friends, and my brother. All hardworking guys who I can trust. My contractor works on an "as needed" and hourly basis. The other two I offered to split the profits with. Now that we have started the reno I am really crunching the numbers hard to see exactly how I can best split the profits, as well as what exactly are deemed "profits" to be split. Here is my plan thus far:

I will treat myself as a hard money lender. I bring 100% of all money into the transaction. I pay cash for the house, I pay for all construction costs, I pay for everything out of my pocket. The house is in my name and all credit being used is mine. AKA, the risk is all my own. I decided to use this aspect as a separate entity and charge for points and interest, just as a hard money lender would.

I deal with the banks, realtors, sub contractors, everything. I am the general contractor, the property manager, the decision maker, and the "brains" of the operation. I am the only one with RE Investing experience. I am the only one with the financial know-how to get it done. I find the deal, I close the deal, and I am the one constantly planning, searching for properties, and reading. I haven't really found a way to quantify this part yet, so no part of the profits are going towards this aspect of my involvement.

The rest of the split has to do with the manual labor. This is what I wanted to the most help with, and this is what I am essentially "paying for" when I split any profits with the other two parties. I am still spending the most hours at the house working (we log ours daily), but I am getting a good amount of help and I appreciate it a lot. From the beginning I told them the amount paid to each person would be related to hours worked. In other words, if I spend 100 hours, and they each spend 50, then I would get 50% of net profits and each of them would take home 25% of the net profit. But most importantly, I have talked to them both about how I hope getting involved is about more than just the great pay. I hope this gets them interested in RE and down the road leads to many rentals, possibly even as partners. For me, its not about making a couple grand in the next two months, but rather, adding another house with some cash flow to the portfolio. I will gladly share the short term profits or the long term gains, if it means that getting other people involved can speed up my long term goals and I can also share it with people I care about. Here is what the (simplistic) numbers would look like at the moment:

Purchase Price: 35k

Reno Cost: 20k

ARV: 85-90k (85k was low end, per appraiser)

Time: 3 months

Rent: 850-900/Mo.

Currently I am saying that as the hard money lender I should make a return on my cash investment (55k). After that I should still have plenty to split with them (~10-15k split 3 ways). So each of us could make 3.5-5k in three months, working a total of 120-150 hours. In my mind that isn't too bad, given that we are all young and could always use the money. They both agreed.

Now looking at all of the work I am doing, with all of the risk, putting up all the capital, and being the general contractor, I am curious as to what others think would be a better way to go about this, as I may continue to try it in the future. Am I being fair the other two parties? Am I cheating myself?

To throw a wrench in to it all, I now have at least two friends that are interested in providing some private money to my future deals. While I am not a full time investor (not yet at least), this would speed up the pace of acquisitions. But it would also lead to a more fuzzy picture about how exactly any profits are split between me and the two guys helping me with the daily labor.

Now that this novel is coming to and end, I am again asking for help. Anyone that has been in these types of profit sharing and partner deals before, please advise. Thank you in advance for any help.