Have a question about splitting up future profits on a piece of real estate. For example: If you have 2 investors - Investor A will put up $25k towards the downpayment, Investor B will put up $75k and they will borrow $100k (joint loan) to finish the purchase (assume they will each be equally responsible for this loan).
What’s a reasonable agreement to eventually split up the profits ? Does Investor A get 1/4 and B get 3/4 of the total Profit ? Or does Investor A get 25% of half, Investor B get 75% of half and they split the remainder 50-50 (which works out to something like 38%/62%)?
Well ideally you will make over 100K in profit! Investor A gets back his 25K, Investor B gets back his 75K then the rest is split 50/50!
If that’s the case I’d love to find out what market you are in so I can move there immediately. In the real world I personally think the second option is most fair. If you do 25/75 of the whole amount Investor A is only getting 25% of the half he is 50% invested in.
Thanks for your reply - but I’m a little confused since I never mentioned an explicit Profit amount. I’m just exploring alternatives to an equitable split of any future gain. So, to be more explicit:
The total purchase price is $200k - $100k financed and the other $100k put up in the way I described.
If, say, the house appreciates to $300k value what is the most reasonable (fair ?) way to split the $100k (assuming no selling fees, costs, or appreciable paydown of the mortgage, etc) ?
Does Investor A get $25k and Investor B get $75k (basically a split based only on their respective contributions to the downpayment) ?
Or do we take into account the equity ‘purchased’ with the $100k loan and Investor A gets 25% of half the Profit and 50% of the other half (totalling approx 38%) and Investor B gets the remainder (totalling approx 62%) ?
Well I was only joking in the part about the profit.
I would take whatever profit you earn and split it in half. Each of you split one half 50-50 and then the other half 25-75. This is the most fair. Otherwise if you split it 25-75 of the total profit Investor A is getting 100% of their cash investment but only 50% of their equity investment while Investor B is getting 100% of his cash investment and 150% of his equity investment.
If you and your partner bring different amounts of investment to the table but do equal work you can choose to pay 5% per year or something interest against the investment amounts and split the profits.
This way your each recieving a “Bank Interest Rate” against the cash investment as “Cash on Cash Returns” and splitting any additional profit.
Ok - a decent return on your cash investment sounds good but probably slightly less fair when, say, the property appreciates 10% and the cash investment has only earned 5% ?
But, am I understanding correctly that the amount borrowed jointly is definitely considered when ‘assigning’ relative proportion of ownership (and therefore when distributing profits) ?
It is a matter of what the two decide. Are each providing labor or additional capital as needed? Consider what each is bringing to the table now and in the future, then come to an agreement.
IMO, each would get their initial capital back and then split the profit 50-50. I would pay back under the original 25/75. A gets 25% and B gets 75% until the initial money is returned.