Here’s the deal. I am thinking about partnering up with a friend of mine to buy multi-fams (a glut of foreclosed ones here). He has a multi-multi millionaire friend, who says my friend is “like a son” to him. The $ man says he will loan ~1mil to us to buy houses and he just wants 7% interest (no points!) on money borrowed after conventional refi.
Before I go further, here some background on the players here:
me - 9 years LL experience, i own 3 investment props in target area, 1year absorbing on
this site, 39yo, married, kids, steady full-time job
friend - contractor, more of silent partner type
$$$ guy - ummmm---->CASH, and lots of it!!
Here’s my plan of attack -
-set up LLC between me, friend and $$man and deposit 1mil into LLC bank account
-find a house, buy cash, and use funds to make repairs and get apts. rented
-set up NEW LLC with me and friend only, sell fixed up house to new LLC from first LLC, and pay off money guy his 7%interest.
-Repeat
The devil of all this is in the details - here are some questions I still have
-should we put $$man in initial LLC with us or keep him as lien holder ?(thinking behind him in LLC with us is all parties show CASH in account and purchase as “cash” buyers, who seem to get better and more accepted offers 'round here)
-legals of LLC, are there standard agreements (or templates) that we could use to structure the framework of the LLC (s) or would an attorney be able to put what we want into the agreement?
I must be missing some benefit to this setup. It sounds like lots of extra tax prep, extra work, extra fees, and extra hassles for nothing.
Just borrow the money. Let it sit in a money market until you are ready to purchase. I would set up the loan such that the lender only gets the MM rate until the money is actually used to purchase something. Then, he gets his 7%.
The standard agreement you find in stores, as freebies on the Internet, or from web sites like legalzoom and legalwiz, and gurus who sell at conventions gives LLC members the right to distributions, management say in LLC operations, access to the accounting and bank records, and requires the LLC to make distributions when it can. Do you want this guy having a say in how you conduct business? He is a bank. Borrow the money from him and pay it back like you would any other lender. He is not you partner.
These standard agreements also void charging order protection. Have you heard gurus say the creditor gets stuck with a tax bill, but they will settle with you since he doesn’t get any cash to pay the bill? Wrong! Only a sucker accepts that premises and creditors take seminars and attend conventions just like investors take them for asset protection. They learn how to beat an LLC. The number of suckers is getting fewer and fewer. The creditor doesn’t get stuck with a tax bill and there is no legal basis to support it unless the creditor actually has control and dominion over the LLC interest. If he has dominion and control, you have a hostile partner and you are the one who will settle to get rid of him. Even if he holds merely a charging order that requires the LLC to pay him rather than the debtor, the standard agreement requires the LLC to distribute if there is excess cash. You don’t have a choice. You have to pay the creditor or you are in violation of your own operating agreement. Does this sound like something you want, even if it’s free? Even if you do everything right, the new charging orders have the following terms, no one takes money out of the LLC, the LLC cannot loan money to anyone, the LLC cannot sell major assets, the LLC cannot purchase major assets, and all rental income must go through a receiver. How do you plan to run a real estate business when you can’t buy or sell property? Do you have an enough cash left over after expenses to pay the receiver? Do you have outside resources to support yourself since you can’t take any money out of the LLC.
You don’t have a choice but to use a qualified attorney, not a real estate attorney or some other kind of bozo who will slop together some standard template that will screw you in the end. Start with a partnership attorney who deals with these types of situations on a regular basis. The three of you need to determine roles and responsibilities and exit strategies and the attorney will draft an appropriate agreement. He will also ask you questions about situations you never envisioned.
Thanks BLL for the great response. So you think we should just form our LLC (me and partner) and leave $$man out, keeping him just as “the bank”. Any other opinions?
Should the 1mill be in with his other funds or should he put it a specially designated account - not that it really matters to me, but just curious
Other questions -
-We are discussing the details of the deal, here are some points I want written into our partnership agreement:
50/50 for repairs/expenses
50/50 profit split for EXIT
min 5 year hold on properties - unless both parties agree to liquidate and/or reinvest
buyout clause (any thoughts how to structure this)
I will be handling most of the day to day operations (managing/renting etc) so I am thinking of doing a 80/20 or 90/10 monthly profit dispersment. My partner would remain mostlly silent and would put in 50% for all expenses and would also get 50% when we sell. Any thoughts on this. He is just basically bringing the money man in for initial financing, and without him, we probably wouldn’t be able to do these deals. I think 50% profit in the end is a pretty good deal for someone that does little or nothing to actually earn those profits. Should I structure it 60/40 or maybe 70/30???
My partner is a construction contractor and has a pretty busy schedule and spends most of his time working in other areas of the state. He has little or no desire to do the fix ups on our future investment properties, but states he may pick jobs on a case by case basis. How can we fairly figure out his compensation if he does work on a property of ours? - or should we just farm everything out? I have a good contractor (so far) that works for reasonable rates and will handle the bulk of the repair work. Any thoughts??
Keep it in the general investment account of the company.
If he’s just finance, then pay him like you would a financier or offer a share of the profits. Just make sure he is a silent partner who gets no say in the operation of the business. Talk over the terms with the guy. You and he have to agree or there is no deal.
Farm it out. It’s too complicated to figure what to pay him IMO.