by Theresa Bradley-Banta
An investment in real estate goes beyond finding and buying a good property. When you put a real estate investment together—especially a partnership—there’s no question you have your work cut out for you.
When you’re the deal maker you should be paid for your hard work and the skills you bring to the table. You agree, right?
Wondering just how much work this involves?
I recommend that you read:
30 Ways to Invest in Real Estate Without Using Your Own Money
(Lists the many ways you contribute to a real estate deal.)
Multifamily Property Checklist for Operating Apartment Buildings
(An extensive checklist for operating an investment property.)
Owning and Operating Investment Real Estate is Hard Work
So, how exactly do you pay yourself for all that hard work? Especially when as the deal maker you must:
- Find the investment property.
- Put your team together.
- Raise funds and get financing in place.
- Oversee property improvements and upgrades.
- Operate the property.
- Create solid exit strategies to capitalize on your investment.
This is a short list. For details, check out the above links. You’ll be glad you did.
Now that you’ve taken a look at what’s involved in putting together a solid real estate project do you see how you will earn the money the partnership is going to pay you?
How to Split a Real Estate Deal With Your Partners
We’ll use the following property information for the two case studies below:
Annual Effective Gross Income:
Annual Net Cash Flow:
Equity at Sale
The following Case Studies are from real partnership pay out agreements:
Case Study 1: A Nice Clean Way to Pay Yourself
Structure the deal so that you as the deal maker (sponsor) take 25% off the top—of everything. You pay yourself:
- 25% of all cash flow (net cash from operations).
- 25% of equity paid at sale or cash out refinance.
The remaining 75% of cash flow and equity is distributed to the partners based on a percentage of each partner’s capital contribution. Note: If you have also contributed capital to the investment you will be paid your portion—in addition to the 25% sponsor fee.
This form of payout is simple to track in terms of bookkeeping and accounting.
How You’re Paid:
25% Equity at Sale:
Case Study 2: A More Complicated Way to Pay Yourself
The methods of compensation above are pretty straightforward. They involve little accounting and are easy for investment partners to understand.
Now here’s an example of a much more complex payout agreement between a deal sponsor and the investment partners.
At acquisition and during the holding period pay yourself:
- 3% Acquisition Fee: One-time “Finders Fee” based on total purchase price.
- 1% Asset Management Fee: Percentage of Gross Income paid annually. (Note this does not include the property management fee.)
- 40% Cash Flow Payout to Sponsor.
Note: The remaining 60% of cash flow is distributed to the partners based on a percentage of each partner’s capital contribution, including you if you’ve also contributed capital to the deal.
At sale (disposition) pay yourself:
- 1% Disposition Fee: Paid to Sponsor upon sale of property (based on total sales price).
- 40% Equity Payout to Sponsor.
How You’re Paid:
1% Asset Management Fee:
40% Annual Cash Flow:
1% Disposition Fee:
40% Equity Payout:
Note: Asset management fees cover general property oversight. Asset management fees do not include payments for property management or property upgrade and renovation management. Read on:
Bonus: Add a Little for Your Extra Work and Know-How
Now let’s make it even more interesting. What if the physical property needs a lot of work? Somebody’s got to be in charge of:
- Working with contractors to develop construction documents, plans, timelines, and budgets for each property upgrade or renovation
- Administering construction contracts
- Monitoring and approving of construction of each upgrade
- Other general construction management activities for each upgrade
Who’s going to oversee property improvements? If it’s you, you want to be sure you’re compensated for your time and commitment.
Pay yourself a percentage (such as 10%) of all hard costs associated with property upgrades and improvements.
How You’re Paid:
When you spend $2,500 to upgrade an individual rental unit you receive $250 (10%) for managing the work done in that rental unit.
Note: Property upgrades should include work in all common areas and in individual rental units.
Which Business Model is Better? It Depends.
- How much bookkeeping or accounting do you want to take on?
- Do you want a payout agreement that’s easy to understand?
- Does one method of payout compensate you more than the other? And is there enough left in the deal to make your partners happy?
- Can you find a happy medium?
Both models are perfectly acceptable. I’ve seen successful real estate investors use both fee and payout structures in the two case studies above. It’s up to you as the sponsor to decide what you’ll offer your partners.
The Two Most Important Questions of All
In every real estate deal I consider, I always ask myself,
“Does this investment offer enough return so that my partners are happy?”
“Is there enough left over to make it worth my time?”