How to structure a partnership for BRRRR

Question

I'm partnering with a handyman/contractor that is an extended family member.  He has 5-10 years of experience and knows quite a bit about general contracting even though he is younger.  Above all, I trust him and we are going to work on projects together.  I feel that he can learn a lot and grow through multiple projects. I would bring the funding and knowledge to acquire properties and he would do the leg work and manage other sub contractors.

The main question I have is what would be the best way to structure potential deals so he also gains from the potential upside?  I want his goals to be aligned with min - profit. Keeping costs low while easy ARV increases a priority.

There's a few options so far that I can think of:

- Hourly pay + upside (what would be an ideal percentage?). For the percentage, I'm thinking between 20-50% however I'm not sure where would be the best split.

- Treat just like a GC and have him bid on the whole job? He doesn't have much experience with estimation for a major house flip though.  Also, this method doesn't align with my goals, He would be looking at making profit on the reno and not on saving costs too.

Also, how would you pay someone on the upside for a BRRRR? Would this be determined at the refi stage where we would take the ARV minus purchase price, costs, etc.

Appreciate any help here.

Steven Goldman · Answer

Hi Nick, I am not sure what you are asking. But let me take a stab at a general answer. You can structure a partnership with a contractor any way you want. The question is what is the partners contribution worth? If the partner is going to run the construction job like a general contractor and make a general contracting fee, than you could give the general contractor a bonus for completing the project within the scope of work, estimated cost and on time. In that situation he is more a team member than a partner. If he is really going to be a partner than you have to determine what percentage of ownership his contribution is worth. Keep in mind he should not double dip. Good luck and keep moving forward.

Craig Clinton · Answer

hi Nick

There's so many different ways you can structure the partnership as far as %'s of profit.  I'm just going to keep my reply general and hope it helps.

No matter what split you end up deciding on, get it all in writing in an operating agreement.  You don't want any misunderstandings as far as who handles which responsibilities......especially with family.

Also, in my humble opinion, I don't think it should be 50/50 split if you're finding all the deals and bringing the funding.  Those are the two most important aspects in investing.  Maybe the split can be:  he get's paid at cost (he breaks even on the reno work he does) and then he gets 35% of the profits and you get 65% or 40/60.

Good luck!

Matthew Irish-Jones · Answer

Also... if he does not have experience estimating rehabs he is not experienced enough to handle a complex BRRR.  Being able to do the work is only half the battle. I am not sure how you can even get into a project without someone that is 100% capable of getting you a quote within a margin of error.

Matthew Irish-Jones · Answer

I would not pay anyone on the upside that does not share in the downside.  If the BRRR goes terribly wrong does he work for free?

Whoever's Capital takes the risk, owns the downside and the upside.  If he gets paid hourly, or as a GC, then gets a bonus when things go well, you have shouldered all of the risk.  You have essentially added more risk because you have less of an upside.  Offer him a fair rate for his services.  If he would like to contribute his own Capital to a project, give him a % of the project that aligns with his contribution.

No risk it... no biscuit!

Drew Sygit · Answer

The challenge is always paying people for what they do and THEN splitting profits!

Contractor should get paid for his work at market rate.

You then want to incentivize them to hold to the budget or bring in under budget. That would be profit sharing.

So you can do partnership OR profit sharing.

Robert Dacus · Answer

Hi NicK:

I  have been approached with a similar situation. I have flipped about 8 houses in Pittsburgh, PA. My private lender has a non-accredited investor that wants to diversify their portfolio with rentals. They do not know much about construction and do not know the market at all. The deal we are discussing is an equity split of around 65/35. They will put up the money to buy and rehab the property using whatever means they choose. Most likely they will leverage their funds with the lender to put in 20% of the LTV. Let's say in Pittsburgh I buy a house for $85k and put about $55k into it ( New roof, HVAC, service line & electrical panel, floors, bath, kitchen cabinets & countertops, water heater, and interior paint). They will fund the purchase and rehab costs.  Once tenanted, it will rent for about $1600 maybe a little higher, but let's be conservative.

Once Rented, the investor will refinance the loan to a 30-year fixed investment property loan. In this particular deal, I can get comps much higher than the invested $140k (more like $250k) so getting all the money back out works. My DSCR is also in check, so the investor gets 100% of their money back (including 5% for the vacancy, 3% for maintenance, 3% for CapEX, and 7% for Property management which I keep) and the property still cash flows about $350 per month. Nothing to write home about. These numbers might normally be low, but keep in mind we just renovated the property. I will do property management and keep the 7% as well as 35% of the rent. When sold I also get 35%. The house is on the good side of Pittsburgh and has grown steadily at 6-8% (actually better but again let's be conservative) year over year for the last 20 years.  I put in sweat equity, with limited downside, and a potential 8% growth or better upside, plus a property management fee of 7%, and 35% of rents. Also, I'm only the Project Manager. I don't do the work, I manage it. I have licensed contractors for all the trades that I schedule and do the work. I also have fully licensed GC's that do some work and others do specialty work (MEP Mechanical, Electrical Plumbing is outsourced).

I'm not suggesting that this is what you should do but only to give an idea of a real-life example and hopefully spark some ideas. Especially those who might be reading and have no money to get started. In this real-life example, I only leveraged my knowledge of the market and construction, found a deal, and put together the pieces.

Cordially

Robert

Nick Phillips · Answer

Thanks Craig, I definitely agree on getting everything in writing. Also, I agree on a higher split percentage for funding/finding deals.  I appreciate the reply!

Nick Phillips · Answer

Thanks for all the responses everyone. Sounds like unless they provide capital or they have some experience with flipping, doing a profit share without risk on their end doesn't make sense.  I think because they are family, I'm thinking about this differently.  I think they would be happy with a bonus or X fee for managing the rehab (local boots on the ground).

Eliott Elias · Answer

A lot easier and less feelings hurt if you treat like a GC and pay according to the bid. Most contractors are not business minded, they want instant gratification. They are also going to be working a lot harder than you are and want to see the money sooner.

How to structure a partnership for BRRRR

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