Partnering with another investor on a rehab project...

Rehabbing, Fix and Flip, Rental Properties
1

I have an investor friend who rehabs almost all the houses he buys, just like me. Difference between his business and mine is he has a very large amount of capital and credit available so he does more flips than me (about 40/year compared to my 8/year).

His contractor can’t keep up and he has offered to do a split with me if I do the work and fund the work, so he can maximize the profit potential on this deal.

He is paying $80k for the house. House was built in '95 and needs only cosmetic repairs which I estimated at $15k. ARV is $194k.

We would split the profit 55% to 45% in HIS favor because he is paying the capital gains tax.

We are debating about who pays the mortgage.

We already agreed we would price the house 10% under comps to get it sold quick so regardless of who pays the mortgage it wouldn’t be for long hopefully. I have used this strategy for the last year and my average time on market is 32 days.

I’ve never done a split before so I’m looking for some suggestions on who should pay what etc… It is all still negotiable, even the repair costs.

He did find the deal and fund the purchase. There is enough meat on this to do a split, so I am open to it because I am between projects right now.

2

Well, the split is based on the net profit not gross profit, so whoever pays the mortgage payments/holding costs should get it back first and the remaining profit gets split.

3

When I’ve done a split, 1 pays carrying costs (utilities, mortgage, insurance, etc) and the other pays repairs. It was easy to keep them separate that way. The other part is that each of you need to keep accurate records of whatever you spend. When you sell, you reimburse the costs first and split whats left.

4

sales price 175

minus purchase cost 80

minus repair costs to deverhart 15

minus interest and holding costs to investorfriend 15

note that payments of principal are not considered. principal cash comes back at closing because only the balance of the mortgage is paid off.

leaves 65. split 55/45.

his payment to you will be a deductible expense for him and taxable income for you. this is NOT a capital transaction (capital gains tax does not apply) because it’s a flip. ordinary income subject to income and SE tax.