Entity/Legal Structure for Flip with Equity Investor

[Jake Silcott]

Hi everyone, I'm reposting in this forum as I may have had this question in the wrong forum yesterday. I searched the site for an answer on this and found some conflicting info. Looking for a little clarification.

My business partner and I will be working with a new equity investor who will fund the purchase and rehab of flip projects in Denver, Colorado for a percentage of the profits when we sell. We have the deal terms worked out. I'm trying to determine the best way to structure the arrangement from a legal/entity perspective.

It seems like the 2 best options are...

1) Option 1: We form an LLC with our investor. When we purchase a property she wires funds directly to the title co. Deed of trust in her name. Promissory note between the LLC and our investor. When we sell she is paid back and profits go to LLC. Does this sound like an effective strategy? How should the fix up funds be handled? Should they be deposited into the LLC bank account and secured by a separate note? What other way could/should the rehab funds be handled?

2) Option 2: We form a JV between our existing LLC and the investor. What would be the benefits or drawbacks to this approach?

3) Option 3: Just have her fund the project without a JV or new LLC. Issue her a 1099 for profits. My confusion here is how to handle the fix up money. Is a separate note typically issued? Also, what type of agreement would we use to spell out the terms of the responsibilities, profit shares, etc?

Thanks for taking the time to read. Please let me know if I can be of service.

[Crystal Smith]

Originally posted by @Jake Silcott:

Hi everyone, I'm reposting in this forum as I may have had this question in the wrong forum yesterday. I searched the site for an answer on this and found some conflicting info. Looking for a little clarification.

My business partner and I will be working with a new equity investor who will fund the purchase and rehab of flip projects in Denver, Colorado for a percentage of the profits when we sell. We have the deal terms worked out. I'm trying to determine the best way to structure the arrangement from a legal/entity perspective.

It seems like the 2 best options are...

1) Option 1: We form an LLC with our investor. When we purchase a property she wires funds directly to the title co. Deed of trust in her name. Promissory note between the LLC and our investor. When we sell she is paid back and profits go to LLC. Does this sound like an effective strategy? How should the fix up funds be handled? Should they be deposited into the LLC bank account and secured by a separate note? What other way could/should the rehab funds be handled?

2) Option 2: We form a JV between our existing LLC and the investor. What would be the benefits or drawbacks to this approach?

3) Option 3: Just have her fund the project without a JV or new LLC. Issue her a 1099 for profits. My confusion here is how to handle the fix up money. Is a separate note typically issued? Also, what type of agreement would we use to spell out the terms of the responsibilities, profit shares, etc?

Thanks for taking the time to read. Please let me know if I can be of service.

There is another option:  

• Form your LLC;
• Have the investor provide a loan to the LLC secured against the property, provide the title company w/ the terms, profit share...... they can prepare the deed.
• Depending on your relationship w/ the investor you have a choice on how to handle the renovation funds; 1) All the funds put in to your account up front or 2) Escrow the funds w/ a 3rd party to be released to you as the work progresses.