Partner with a 50/50 split? Better way… - Posted by John Corey
Posted by John Corey on May 27, 2006 at 07:53:07:
Look at the replies where people tell of long term friends that turned on them once they had a deal set up.
Note the comments about getting everything in writing so stuff you did not expect is covered (death, divorce, law suit from an third party).
Consider that the standard logic is the person with the money gets what they have into the deal back before the profits are split. 50/50 split of the profits is what you find in most books.
How about a iron clad way to partner with a split closer to 75/25 (cash investor gets the smaller percentage)? A true silent partner that will not want a say in the day to day details.
Then consider hard money. The ‘expensive’ “15%, 5 points financing”. If you can run a financial calculator will HM come out less expensive than an equity partner on a 50/50 split.
Note that if the hard money is not less expensive you likely have a very bad deal. The suggestion is to bail rather than do the deal.
Hard money is not for every deal.
I do find it really funny watching an audience groan when I tell them the typical hard money rates. Then I ask the same group if they would take on a partner for a 50/50 split (double the cost of hard money). The audience lights up and uniformly says yes with no concerns about the true financial cost. They hear 50% of the profit with none of their own money. They do not think about how they could have had closer to 75% of the profit with none of their own money.
If you do want to go the route of an equity partner (HM does not work for some deals where the amount of work relative to the present value is high) consider using an option agreement. One partner has full control while the other partner has an option. Money guy normally has full control with the labour person holding the option.
Note that in some states it would not be legal for the labour partner to do any work on the property is they did not have an ownership stake in the property.