My brother and I would like to start a property investment company / portfolio. Buying run down houses, doing them up and then either selling them or renting. The big question is how to split this evenly. I would probably put forward the initial cash to buy the first house, get the mortgage and then continue to add funds to gear it up (if it works!) as and when I earn them. I would deal with all the finances, tax, banks etc. He would be the man on the ground, overseeing the builders, picking the houses to buy. In the interests of family harmony we think it would be a good idea to keep the equity at 50/50 but he understandably doesn't want that holding to be overly diluted when I put more cash in. He suggested the extra cash goes in as a loan at 10% but from my point of view this is a poor return having given 50% over originally and then exposing myself to further risk with limited upside potential on the additional money. At a guess We would divide the labour roughly 75 % him / 25 % me but this is only a guess and it could be different. What is the fairest solution ? Would some sort of dividend linked to the profit work? Preferance shares? or perhaos some sort of bond? We would perfer to keep it as simple as possible so that there can be little room for different interpretation of figures down the line. Any insight greatly appreciated. Thx very much for your help
So then don't dilute. He is continuing to put work(so called sweat equity) in to the company so why would you not need to keep putting money in to keep pace?
From a strictly fair point of view it seems odd to say that it should start at 50/50. If you put in a million dollars and you value his time at 100 an hour it will be a long time before you hit 50/50 on that equation.
"Overseeing builders" and "picking houses to buy" does not sound like much work or sweat equity to me. Also - as the person on the hook for the money I would want to be the one with the decision on the houses. I assume you mean he is doing the leg work.
I have managed rental real estate and worked with people who flipped houses.
I think you have a lot more to think through. My suggestion would be to do one deal first. Then after that is completed, sold, etc. you can consider arranging future deals. I think each house will be a case-by-case basis - you should not make a hard and fast rule before taking them on. No house flip or contract will be the same as another.
Most times the person who finds the deal and brings it to an investor (the finder is called a "bird dog") makes a small fixed amount - not a percentage of the profit. This is standard practice and I would not change it - even for family.
"Managing contractors" is not the same as doing the work yourself - again, this is hardly worth giving a percentage of the profit away. He is taking NO risk and should not get the big rewards. I would pay him a flat fee per deal or per house or maybe even a percentage of the cost of the contractors.
If he actually does work on the houses then that changes things a little.
Be prepared to get into fights with your family and not speak to them for years. Doing business deals with family has a potential to screw up relationships.
Most real estate partnerships and deals of the scale you are talking about that I know of are just individuals or LLCs - never a corporation.
Again - you are the investor and taking ALL the risk. The only thing he has into it is time. If he wants to share in the upside then he should put his name on the loan too and put some money into the deal. This is definitely not a 50/50 enterprise from what you describe above.
If you want to sweeten the deal you might consider some "steps" for payouts.
For example he gets a $500 fee for bringing a deal that you close (or whatever you think is fair. Be careful about this and Real Estate licensing laws) Maybe he should get his brokers license?
Then he gets either a cut of the contractors' expenses or a flat fee for managing the work.
Then based on the net profit you make he can get a percentage. I would NOT go too high on this. You are taking all the risk - not him. But this scenario gives him incentive to maximize the profits.
If he is doing actual work on the house then you need to figure out what that translates to - Unless he is a professional builder he should not get the same rates as a contractor. You can pay him for the work or convert it to "equity"/share of profit.
I would figure out how much money you're putting in and figure how much time he's putting in, and figure out what his time is worth in dollars. Then divide the equity based on the dollar amounts from those calculations.
You could always:
(1) Issue only a portion of the company's equity to you both at the beginning, and more equity could be issued to you as you put in money and him as he puts in time, based on how much his time is worth.
(2) Give a management contract to him and pay him a fixed fee per item he handles.
I'd carefully think this through before beginning. I'm in the real estate business on the side and even when buying foreclosed and short-sale properties, it's tough to make money.