I'm sure there are many possible answers to this question, but what is the right way to break up the profits when two or more investors partner together on a deal (whether it's a flip or a long-term buy and hold deal)?
I'm sure it depends on how much money each party is bringing to the table and how the work is being divided between the parties involved - so I guess what I'm asking is, is anyone willing to share a real life example (or two, or ten) that they were actually involved with?
If so, I'd love to know any of the following:
What kind of property was it?
What was the purchase price and eventual sale price (or monthly rent amount)?
How many parties were involved in the partnership?
How much money did each party invest in the deal?
How was the property held (under one co-owned LLC? among multiple people and entities? something else?)
It would be great to have some real life examples to use as a reference point when I try to figure out what partnerships could look like when I'm trying to put together deals with other investors.
I think the answer really depends on what your end goals are and what the end goals are of your partner. Are you someone with more time than money? If so you may want to find someone who's the opposite. If they're looking for passive income and don't want to do any of the work, then you may be able to work out a win-win. Here's an example of a deal I did where I put in $0 of my own money (with the exception of travel expenses and marketing). The reason I was able to do this is because my partner didn't want to do any of the work and I was willing to do all of it.
What kind of property was it?
2 acres of vacant land
What was the purchase price and eventual sale price (or monthly rent amount)?
all in cost was about 25k, sales price was 65k. After my partner recouped his initial investment, the profit was split 50/50
How many parties were involved in the partnership?
just me and my partner
How much money did each party invest in the deal?
partner funded 100% of the deal
How was the property held (under one co-owned LLC? among multiple people and entities? something else?)
The property was put into a trust with a lien going to my partner. I received my portion as the beneficiary of the trust.
The other thing I would say is it's important to make sure there's enough "meat on the bones" for everyone involved. My partner was happy to fund a deal like this because he was able to make nearly a 100% return within a month. It also worked great for me because I was able to make 20k with almost $0 out of pocket. Although it was a time intensive project, it was still worth it.
I've also done partnerships where we split the marketing costs for acquiring properties and in exchange they received 10% of any profits from those properties. Last year I had a double closing lined up where I was simultaneously buying and selling two lots. The owner of the title company gave me a hard money loan to cover the acquisition costs in exchange for a fee. Although it was extremely short term and not exactly a partnership, that's another option to consider depending on the deal you're doing.
I'm also looking to put together a deal for a storage facility on the the same terms. I'll do all the work and the investors put up the money with everything being split 50/50. Again, these types of deals work because I'm able to offer something to my partners; good returns with little work. Depending on your situation and your partner's situation, these types of deals may not be the best. Maybe you're willing to put up more money, but do less work. Whatever the case is, figure out your goals and your partner's goals then find deals that you can structure to meet those goals.
@Dan that's perfect Dan! Thanks for the summary. It sounds like it depends on how "hungry" each party is to be involved with the deal.
Even though some might balk at the idea of giving 50% to someone who puts no money into the deal, I think it can still make a lot of sense, especially if the $0 down partner does 100% of the work (because any investor worth their salt knows how much work can be involved with some real estate deal).
It all depends on the terms of the partnership, and what value is being brought to the table.
In the land flipping business 50/50 splits are pretty common between the land flipper and the financial partner, where the land flipper does the majority of the work and the financial partner puts the funds up to purchase the property.
In my business I use a sliding scale:
If the property is sold within 0-3 months it's a 75/25 split in my favor (as the land flipper) after closing costs and agent commissions.
If the property is sold within 3-6 months it's a 65/35 split
If the property is sold within 6-12 months it's a 50/50 split
f we reach the 12 month mark, I give the private money lender/partner the option to call the note due, meaning they get their principle back plus a bare minimum interest percentage, that varies based on the deal (normally around 10%).
@jarenb Jaren, what have you seen in terms of structure for land deals that is common- are the parties going in together as Tenants In Common, using an entity, or structuring as a loan with a note and deed of trust/mortgage?
@dan hi! To better understand, regarding those 25K anticipated by the Partner, did you give back to him the half of it once you were paid the 65K?
Thanks.
Arturo