Hello,
I am opening an hostel with a friend of mine and we are currently looking at different option of equity split.
Basically, he brings in a property that is undergoing renovation and I finance all the costs realted to the hostel (beds, bathrooms, floor elevation, garden...)
How would one go about the equity split in this situation?
The house is worth about 150k$ and his family took a loan to aquire it.
I'm going to finance the hostel for about 50k$.
Do we split according to the money that we bring in? But it doesn't factor in the risk as my 50k$ might be dead money in a year whereas his house is a safe.
Do we split according to rental value?
Does anyone got into this situation? or might have an idea how to deal with it?
Thanks
5 years
Here is a previous discussion about a similar situation:
How do you split profit between hostel owners?
There wasn't a difinitive answer of "the right way to split it is XYZ" but it brought up some points to consider when you discuss with your partner what each of you thinks is fair.
Have you already sat down together to discuss some options? I'm curious to hear which options you consider and how each of you view the pros and cons.
5 years
@Rucksack Brian
Thank you for your response! I already read that post and found the information in the comments very helpful but unfortunetly we haven't the same situation...
We agree that we can't value the value of the house the same as the value of the cash but we can't quite figure out something that would be "rational" instead of just a rought guessing.
We would be fine with 50/50 but we still want to get a fair valuation and were curious if a similiar situation already occured to a member of our community!
5 years
@Rucksack Brian
Thank you for your response! I already read that post and found the information in the comments very helpful but unfortunetly we haven't the same situation...
We agree that we can't value the value of the house the same as the value of the cash but we can't quite figure out something that would be "rational" instead of just a rought guessing.
We would be fine with 50/50 but we still want to get a fair valuation and were curious if a similiar situation already occured to a member of our community!
5 years
But what is the legal relationship between the owner of the house and the hostel business? Is your hostel company a tenant paying rent to the family that owns the house? Does your hostel company own the house?
If the hostel company now owns the house then he is investing $150K in the company and you are investing $50K in the company. Based on valuation you're 25% owner and he's 75% owner. If your hostel business fails, you still own 25% of the company, which in this case, includes the house. If your hostel company doesn't own the house then naturally it's an entirely different story.
5 years
@bundathunda That's indeed a nice answer. Let's suppose that the hostel would act as a tenant, what do you think would be an optimal approach? Because let's suppose that the rent worth of the house is 2k per month. Would we say that 100% stake is mine at the beggining and that it would get diluted every month if we add the 2k? Also if I renovate the walls, I would technically "add" value to the house, how would one go about quantifying everything? I'd love to hear your imput on that as it is currently a little confusing and I couldn't find a decent exemple online
5 years
If your hostel is a tenant then "who pays for improvements to the house?" is answered by your lease. In some leases the landlord pays. In other leases the tenant pays. Some lease structures are certainly more common than others but that's an entirely different discussion. Hypothetically, you could consider that your business partner is investing $2K per month in the form of rent, but this would be a bad idea. As you pointed out, he starts out having no equity and you will have to calculate every month how many shares in the hostel you are selling to him that month in exchange for the free rent. This calculation will be based upon the current value of the hostel so it will constantly flucturate. This is obviously a pretty unique case and I doubt you'll find a simple solution laid out online. If you'd like help with devising a strategy you can email me at [email protected]
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