I’m a new real estate investor (flipping and rentals) and one of my coworkers in my main job does the same. We’ve decided to go into business together in my LLC, and i’m not sure how to structure the arrangement to make it fair.
To give some history, I have some experience, but not much - about 6 months. I do, however, have most of the money involved and have an OK amount of experience in repairing houses myself. He has much less cash to play with but has a lot of experience in the areas of buying homes, fixing them up, and getting them rented.
What I’m considering doing is: for the houses I find myself, and buy, pay him for helping me repair, straight cash. For the properties he finds, or helps invest on, we do the repairs together and split the profits of the rent or flip, 50/50. I’m not sure if that’s fair or if it’s leaning too much his way or mine - I feel like if anything it’s more than fair since it’s mostly my money we’re playing with, and money is a harder commodity to come by than free time for working.
For starters, both of you sit down in your separate dwellings places and put in WRITING everything you expect out of the deal. I mean EVERYTHING!
Then go over these together. Be brutally HONEST with each other. If the relationship cannot stand that, it is doomed.
If you are still in agreement sit with a competent attorney and discuss what you are proposing. I would also sit with a CPA as “Paying straight cash” for work can be dangerous.
Hell hath no fury compared to the tax man who feels he had been cheated.
I see a myriad of problems that MUST be adressed if you are going to be successful.
Get all the problems out of the way UP FRONT…they will come back to bite you.
ESTABLISH a business plan, nothing goes sour quicker than “Oh, I thought you wer going to do that…or…you were supposed to put up the $$$…what happened, or, where were you yesterday?”
This is good advice. He’s a coworker in my main job (I have 3 now).
There are a few free business clinics in the area and i’ll get with them about legalities. I think what the plan is going to be, he will help find the homes, i’ll purchase (just bought 1, closing on another today or monday), he will repair them at some labor cost, and we will split the gains after i’m compensated.
Cover EVERYTHING. Who is doing what, for what compensation. How will profits be split. If a deal goes bad, who gets what. What’s the exit strategy. What’s plan B. Plan CDE. Who contributes what when the partnership is out of cash. How does this affect the share. What happens when one partner dies, divorces, gets married, stops working. Cover it all up front, so you avoid unpleasant (and costly) surprises later.
It sounds to me like he should be treated more like a contractor.
Have him bid the rehab job with a tidy profit for himself on the rehab portion vs the whole project.
15-20% is common for GC’s.
If he found the house too, maybe he bids it at a 25% profit.
This way he gets paid for his labor with a nice extra profit for being your “partner”.
Also if he get too busy with his day job you can get another contractor and not have to split the profit with your partner who is slowing down the project from completion. If he wants to pay you as a day laborer for whatever work you do that would be separate.
This keeps it tidy and he gets his profit quick and easy.
How do you figure the split on a rental?
The formulas can cause more angst then it’s worth.
Once he’s saved up some of his profits from these deals he can come in on a percentage basis and you’d want a partnership agreement for that.
I must agree with previous posters who advise on getting everything written down and checked out by a lawyer if you’re going to go that route.
Here’s the thing about the partnerships. The two of you must have complementary but different skills sets. I would suggest that the guy with the money (you) is a more important partner to have because the other skills can be rented or contracted.
You can spend tens of thousands in legal fees and consulting setting up asset protection, but here’s my basic suggestion. As long as you get this framework down, you’ll do well: C-Corp. You guys are both shareholders (whether it be 50/50 or 51/49, whatever level of control you’re comfortable with). You loan money to the corporation instead of trading shares for equity to buy that duplex or SFH that needs to be rehabbed with the property as collateral (if you both put money in, you are the first mortgage holder, he’s the second since he puts in less). If your partner decides to get lazy and stop working, you recall the loan.
You can even set it up that your loan needs to be renewed every 6 months, so if see poor progress, you recall the loan at the end of the 6 months and foreclose on the project house to get your money back. You can even put it in writing on what progress you expect to see every month or two from your partner to get it in marketable condition so your partner doesn’t feel like he’s left in the dark. As long as you’re clear on what’s expected of him, I don’t see what the problem is with such an arrangement since you’re the one taking most of the risk with your money.