Good Morning,
I have the ability to form a partnership with 2 brothers. They have the money I have the expertise. We have a family Realtor involved to find the deals, however, I will be looking as well. In this market we are thinking of rehabbing and holding for renters. Flipping would be great but NOTHING is making a profit. Wondering how to structure this deal (there is talk of purchasing many homes for rehab) so that it is profitable for all. Any advise would be helpful. Thank You.
Are the brothers going to do anything at all besides provide money? If not, then why not consider just doing things yourself and using them as your private money lenders? They could get a good rate of return on their money and it would be secured by real estate. They would be hands off from the labor side of things. They would just need to feel comfortable with the loan to value of the projects. You would be handling the labor and management of the properties.
If they also want to be involved in helping with rehab and other aspects of the business, then an equity split is probably best for all in that situation. You’ll just have to all come to an agreement of what percentage everyone feels comfortable with. If they are providing the money as well as a lot of labor, they may feel that is worth more of a percentage than what you provide.
The most important thing is to get a well thought out agreement in writing from the beginning. It should spell out the expectations for each party involved. It should also address numerous contingencies like what happens if someone wants out, dies, etc. Think of different possibilities. Someone may get divorced or run into money problems. You want to know how those things are going to be handled.
You also should try to determine everyone’s vision for this business. Are they going to want to do this for the rest of their lives or is there a time horizon they’re envisioning. How would they buy you out or how would you buy them out if that was necessary?
Thanks Justin…will consider all of the above suggestions.
As of right now they are the lenders and that is all. As you mention this could change.
Justin is correct…chances are not only that it may change but it will change.
Have been in partnerships…LOOK long and hard…DECIDE and put on PAPER everything that you expect from it, AND everything that they expect from it…LEAVE nothing to chance.
TRUST has nothing to do with it…Good Business dictates that it be in WRITING!
it works exactly how the three of you decide to split things and PUT IT IN WRITNG in the partnership agreement.
It needs to address everything you said, plus:
who’s gonna do what and who’s gonna get what in compensation. Who’s gonna go when the water heater goes out at 2 am. Who’s gonna pay when the roof leaks and you have to fund the entire repair because his daughter’s getting a $40,000 wedding. What’s gonna happen when he dies and now you own a property together with his widowed wife who has remarried a mobster. What’s gonna happen when he gets divorced and his wife’s atty sends you a letter that ties up your third of the partnership in court. What’s gonna happen when you’re ready to sell because you’re fed up dealing with snotty tenants and a deadbeat partner and he doesn’t want to. What’s the exit strategy? Who’s gonna pay when it’s been vacant for a year and the house is about to go into foreclosure? When it gets foreclosed, and you can’t sell because it’s underwater, who signed the personal guarantee?
Yep, I’ve seen all this happen.
Who’s going to decide if this is a flip or a rental? What’s your exit strategy? What’s your plan B, C and D if this strategy doesn’t work? If you’re in plan D, who is paying for what (see above)?
Decide in advance. PUT IT IN WRITING.
BTW, I don’t do business with friends or relatives. It always ends up losing one (the business) or the other (the friendship). You’re dealing with brothers who will have an emotional investment in addition to a financial one. Keep this in mind and protect yourself. Business is business. Everything else is something else.