Finance options in partnerships

[D'Andre Brumfield]

Hello all,

I am developing a partnership with 3 other people who I know and trust well. We are looking to fix and flip our first 2-3 deals and use the profits to scale up towards buy and hold strategies. This will be the first deal for each party involved but we all have history in construction, remodeling and project management. We are currently discussing financial options for acquisition. We have a potential private money lender to fund our first deal and would most likely set up an LLC for this instance, but nothing has been set in stone.

In the case where this private money lender retracts their help, what options do we have in terms of credit union/conventional loan financing? We do realize that an LLC may not be an option in reference to conventional loan packages. We are actively sourcing CPA's/Tax advisors for legal advice and I was wondering if anyone in the BP community had any other suggestions or even questions that we may need to bring up during the advising meeting.

[KC Pake]

Quote from @D'Andre Brumfield:

Hello all,

I am developing a partnership with 3 other people who I know and trust well. We are looking to fix and flip our first 2-3 deals and use the profits to scale up towards buy and hold strategies. This will be the first deal for each party involved but we all have history in construction, remodeling and project management. We are currently discussing financial options for acquisition. We have a potential private money lender to fund our first deal and would most likely set up an LLC for this instance, but nothing has been set in stone.

In the case where this private money lender retracts their help, what options do we have in terms of credit union/conventional loan financing? We do realize that an LLC may not be an option in reference to conventional loan packages. We are actively sourcing CPA's/Tax advisors for legal advice and I was wondering if anyone in the BP community had any other suggestions or even questions that we may need to bring up during the advising meeting.

Hi D'Andre!

Entering the fix-and-flip arena can be quite exciting and rewarding, especially when partnered with like-minded individuals who have a background in construction and project management.

Regarding your financing concerns:

Conventional Loan Financing: If your private money lender falls through, conventional loans can be a viable option. While it's true that many lenders hesitate to lend to an LLC, some will still do so if the managing members personally guarantee the loan. Here are a few options:

Residential Loans: If one of the partners agrees to reside in the property for a specified duration (usually at least a year), you may qualify for an owner-occupied mortgage, which typically has better terms than investment property loans.

Investment Property Loans: If you don’t intend for any partner to live in the property, you'll be looking at investment property loans. These typically require a larger down payment (often 20-25%) and may have slightly higher interest rates.

Portfolio Lenders: Some local banks and credit unions hold onto the loans they make (instead of selling them on the secondary market). These lenders can be more flexible with terms and might be willing to finance a project under an LLC.

Hard Money Lenders: These are private individuals or groups that offer short-term, high-interest loans. They're more concerned with the value of the property and the deal itself than your credit score, making them an option for fix and flips.

Home Equity Line of Credit (HELOC) or Home Equity Loan: If one of the partners has significant equity in their primary residence, they could potentially tap into this equity to finance the deal.

As for your upcoming meeting with the CPA/Tax advisors:

Ask about the tax implications of flipping properties within an LLC compared to doing it as individuals.
Discuss pass-through taxation and how it will affect each member.
Review the benefits and drawbacks of different business structures (LLC, S-Corp, Partnership, etc.) for your specific situation.
Address the issue of distributing profits and losses among the partners.
Get clarity on the tax consequences of using private money lenders vs. conventional loans.
Ask about any state-specific regulations or tax incentives that might benefit your venture.

Lastly, always ensure you have a well-drafted partnership agreement in place that clearly outlines roles, responsibilities, profit-sharing, and what happens in various contingencies (like if one partner wants to exit the business).

All the best to you and your partners.