Everybody starting out and considering bringing on a partner has this question. First, some definitions:
Equity – the percentage of the deal. When the property is sold and the bills are paid, what’s left is divided among the partners by their equity percent.
Money Partner or Equity Partner – this is a partner that brings most of the cash to purchase the deal, but does almost none of the work.
At first blush, you might be thinking, “Why would I ever want to bring on someone who doesn’t do any work?” You would be right to think that. It’s always better not to have a partner if you can. But, there are some times, where you can’t do the deal without a partner. You really shouldn’t be bringing on a partner unless that partner provides some value that you cannot provide yourself. Why add another cook to the kitchen if you can do it yourself? Since you’re looking to bring on an equity partner that means you do not have the cash to do this deal yourself. Without the equity partner you could not do the deal.
Let’s start by looking at the deal in terms of risk. You’re going to be doing the work. Your partner is going to be bringing the cash. The work is important and has a value but essentially carries no risk to you. If you were to get sick and not be able to take care of the property, and the property failed, the bank would foreclose on the property and whatever cash your partner put in would be lost. You would be able to exit the deal and move on to the next project but your partner would be out his or her money thus no longer being able to do any more deals. That’s a level of risk orders of magnitude greater than the risk to you in doing this deal. Because of this high level of risk you won’t be able to entice an equity investor without a high level of reward. That comes in the equity split that you offer.
It’s much better to look at this as what type of benefit you’ll be getting. Since you don’t have much cash you will benefit much more from receiving the cash flow in the project. Your partner already has money and likely doesn’t need to have any additional cash flow. When doing work on a property there is a value for that work and that should come out of the cash flow. When you look at it this way the work that you put in doesn’t do anything to build your equity in the project, it only provides you an income, which you need but your partner does not.
I generally think that finding the deal and putting it together is worth about 10% of the equity. If someone came to me with a deal and wanted me to partner with them I would offer them that 10%. Assuming I had to come up with all of the cash, I would want 90% of the equity. Similarly, I’d expect 10% of the cash flow but 90% to go to this person for the work they were doing. The split would change depending on if that person brought some of his or her own money. We would then divide up the remaining 90% based on how much cash each of us brought.
In the end, it’s whatever you both agree to, but I see too many people turn down their first deal because they can’t find an equity partner willing to agree to their terms. Get your foot in the door and get started. The education is worth 10x more than any work you’ll do. For more advice on partnerships, read this article.