JV structure with son-in-law who is contractor

[Greg Parker]

Hi team,

I am an investor in the Pittsburgh market - currently holding a few duplexes. My son-in-law is a contractor and we are going to set up a JV company to allow us to scale up and use BP's buy-rehab-refi-repeat strategy to generate passive income and get him and my daugther started on the real estate investor path.

My question is around how to structure a fair deal with my son-in-law.  I provide the money and he will do all the work.  If we were flipping it is relatively easy (say 50/50 split of profits after sale) but if we are holding what does the community think a fair way to set up the structure.  Should he be paid on the way through?  Should we split cash out after refi?  

Rough numbers on Pitt duplexes (based on my last two purchases/renovations) are as follows:

Purchase - $30,000

Renovation - materials $20,000

Renovation - labor $25,000

Renovated value say $100,000, rents for $1,500/month, allowing refi of $80k.  Cash flows nicely, then we can repeat.  Plus I would have to fund the acquisition of the next deal before we finished this once so all up capital of say $100,000.

I feel it wouldn't be fair for him to not be "paid" even if it is from the refinancing proceeds?  But probably not 100% of the cost.  We both need to leave the same/similar amount of money in the deal but by refiancing aren't I pulling out all my money for the next property?

Bit confused by it all!

[Dominic Lucarelli]

This is a great question. The answer isn't as simple. What are both of your goals? What do you think would be fair?

Is he doing the labor for a stake in the monthly income? If you are funding the deal with $50k and he is completing $25k worth of labor as his payment, it seems reasonable to split 66%/33% of the results. So in summation, you fund the entire deal while he does all the labor (up to YOUR standards) and he is compensated with 33% of the monthly cashflow into infinity.