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Updated over 6 years ago,
Partnering with contractor - how to split profits?
So I know this contractor who has done a few jobs for me at my own home. He does high-quality work and is trustworthy. During the most recent time he was at my house, I asked him if he ever does any flipping. He said yes, he does and in fact has a few prospective deals coming his way. I mentioned that I have some capital that I'd like to put to use and we should talk about partnering. He agreed but since he was busy on the job we didn't really have time to discuss it further.
So of course, one option would be for me to just be his private money guy and structure it as a debt deal, but I'd really rather get a little more skin in the game and partner with him. My question is, how would we divide the profits? My first thought is that we'd split them after his expenses, proportional to the amount we each had in the deal. For example, say we bought a property for $200k, $150k of it mine and $50k of it his. Then he rehabs the property at a cost of $50k, and we sell it for $400k. He takes his $50k rehab cost, then the $150k profit is split $112.5k to me and $37.5k to him.
I realize that this requires me to have a certain degree of trust in him to not inflate his costs but I am willing to take that chance. He is really a nice guy and I don't think he would rip me off, and if he did, well, that would just be the last deal we did together.
Does this sound fair and reasonable? Am I missing anything? What about closing costs (e.g. realtor commissions)? Should they be paid equally or proportionally?
Thanks for any input.