How should a $120k equity partner split a six unit deal with a first time operator

Trenton specifically matters here, because that $1.1M exit assumes a buyer exists at a 7 cap in Mercer County, and that market is thinner than people model for. Stress-test the exit at a 7.5 or even an 8 cap before either of you gets attached to the IRR math you are arguing over. On the structure itself, smaller JVs like this come apart over the two vacant units far more often than over the waterfall, because the lease-up timeline almost always runs longer than the operator projects, and the pref keeps accruing while the relationship gets strange. If he is managing full time with no fee, a 60/40 flat after pref is operator-friendly and still defensible, and you are right that at the IRR levels you are projecting it probably costs you less than the tiered structure anyway. The thing worth pushing on instead of the split is what happens if stabilization takes 18 months instead of nine. Does he have reserves he is contributing, even a small amount, or is every dollar of working capital coming from you? An operator with cash in the deal behaves differently when unit two sits vacant in month seven. The promote hurdle friction on a $120k check is real. The piece to lock down tighter than the waterfall is the decision rights around refinancing or an early sale, because if he finds a buyer at month 30 and you have not hit your 15% yet, that is where a flat 60/40 with no hurdle actually bites.

The missing piece is what happens if he burns out managing two buildings for zero fee and stops picking up the phone.

The 60/40 flat with no hurdle is probably fine for this size, and the case worth studying is a Camden deal from 2021 where the structure looked just as clean until it came apart. $95k of LP equity, comparable building, flat 65/35 with no promote. What nobody nailed down was the definition of "distributions" in the operating agreement. The operator was pulling a management fee of $600 a month out of gross before any pref calculation, which was not explicitly prohibited, and by month 14 the LP was still sitting at zero cash received while roughly $8,400 had gone out the door. That is ambiguity at work, and unwinding it cost about 14 months of pref accrual and a lot of goodwill. On your actual split question: a tiered promote on a $120k check with a five-year hold is genuinely not worth the drafting friction if you trust the operator's execution, and your instinct about that is probably right. What deserves more of your attention than the headline split is the waterfall trigger and the fee netting language. If he is taking no AM fee now, define now. Put a number in the agreement: no fees of any kind without LP consent until pref is paid current. And clock the pref from closing rather than from stabilization, because two vacant units means you are funding carry from day one. If Trenton vacancy runs long, twelve months instead of six, your 8% on $120k is $9,600 a year sitting in an accrual column while he is still drawing breath from the asset. Pin the start date.

The thing I keep seeing operators do on their first acquisition is underestimate stabilization time on a building with vacancy already baked in at purchase. Two vacant units in Trenton right now, depending on where exactly in the city, could be 60 days to fill or it could be 5 months if you hit the wrong season or the units need more work than the pro forma assumed. That gap eats directly into your pref clock and your IRR, and a flat 60/40 with no hurdle means he's splitting day-one cashflow with you even if you're still sitting at one stabilized unit four months in. The tiered promote is actually doing real work for you there, not just on the upside but as a behavioral signal about what matters first.

That said, where I'd push back on your own model is the no asset management fee piece. He gave that up but he's also running six units full time, which on a $7,200 gross rent building means he's working for maybe $1,400 to $1,600 a month split after expenses before any promote kicks in. That's not sustainable and it creates a different kind of risk than a bad operator creates, it creates a burnt-out operator who stops picking up the phone around month 18. What I've seen work on deals this size, specifically sub-$150k equity checks where negotiation friction is real, is a hybrid: pref stays, you compress the first tier to 65/35 instead of 70/30 and you cap it at your 15% IRR threshold, then flip to 50/50. You're giving up maybe $8k to $12k at the IRR levels you're projecting and you keep the structure that protects you during lease-up. That's the part worth keeping.

At $120k, the structure matters less than whether those two vacant units lease by month six.

Trenton's vacancy risk is the variable eating your model. Two open units in that market can sit 6-9 months if the lease-up stalls, and your 8% pref starts accruing against a guy who isn't getting paid anything until you're whole, which creates misalignment fast.

I'd counter with 60/40 flat but add a 6-month lease-up milestone tied to a small promote bump for him if he hits it on time. Keeps him motivated without you giving up the structural protection entirely.

The 8% pref on $120k is $9,600 a year, and the negotiating energy is going into protecting that number while the real question is whether those two vacant units actually lease at $1,200 each in Trenton's current market. Flip the energy. Spend it stress testing the lease up timeline, because if stabilization takes 18 months instead of nine, the IRR model falls apart whether the split is 70/30 or 60/40. A flat 60/40 from dollar one after the pref is cleaner on a five year hold with one operator doing real work, and frankly the tiered promote only punishes him when he outperforms, which is backwards. The term worth adding is a clear buyout trigger if lease up stalls past month 12, so there is an exit ramp before a $480k asset starts drifting.

Those two vacant units in a six-unit Trenton building could take 18 months to stabilize, where your model probably assumes 12.

The promote hurdle only pays off if he actually outperforms, and if you do not believe he will outperform, the deal should not be happening at all. That is the circle you are running in. On a $120k check in Trenton with two vacant units and a first time operator, the 60/40 flat is the better structure. Skip the friction and put the energy into agreeing on a clear decision rights clause covering capex above, say, $5k without your approval.