Profit Percentage in Partnership

[Carlos Solares]

Hello BP family, I have a remodeling company. In 2010 I created a partnership with an investor. The investor has 95% of the business because he provided the majority of cash. I invested a smaller amount, manage the company and I use my remodeling co to fix the properties. The profit of each flip is based on the percentage we individually have. I feel that we are putting all effort; for this reason I would like to have more participation or larger percentage in the profits. What do you think it is a fair percentage for this situation? How would you approach the investor? Thanks.

[David Beard]

Wow, @Carlos Solares , one of the most searching questions in real estate.

First of all, I disagree somewhat with Rich, there is scarcity on both sides of this, a limited number of good/experienced flippers, and a limited number of willing funding partners. So there is a healthy tension, and so the 50/50 split that is so common has a certain merit to it.

I also fund flippers (that are experienced and that I like) on this 50/50 profit-sharing basis. I provide 100% of all costs. For this type of deal, I expect the project to be directly managed by the flipper, not farmed out to a full-service GC, which is too expensive. The flipper will make all design decisions, find and oversee subs, obtain materials as needed, and typically use an investor-class "crew" that handles most of the basic work (drywall, carpet/tile/vinyl, painting, basic carpentry, etc.) In other words, I'm not going to pay for a project manager or general contractor, as that should be the flipper's job, and they have proven that they're good at it.

If I'm making a straight loan, then I'm less concerned about how they staff the project, though I will review their rehab estimates and ensure that there is enough profit there to pay me and provide them a strong ROI.

OK, that said, you have a renovation company and are potentially extracting some profit from the deal via your company's profit margin. If you are just passing along your cost, or cost plus a little more to compensate for the foregone business, then I think 50/50 makes sense. The deal you have now sounds pretty skewed toward the investor.