LLC partnership, ROI for each person?

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Thank you everyone for the input. I'm glad that I've been spending the last 2 years reading books and this forum rather then just jumping right in.

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J Scott, thanks for the input as well. I'm planning on doing some fix and flips but like you said, will still need a money partner to get the hard money. So, in that case, I would still do the 50% profit split with them, right?

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Coming from both the lending and the borrowing perspective (I do both), I think this is perfectly reasonable for a new investor just starting out with no cash. Even hard money (which would generally cost less than giving up 50% of the profit) is going to require you to have skin in the game, so a 50/50 partner that doesn't require you to put in any cash is a pretty good deal. In fact, that lender is still taking a pretty big risk with you. Now, once you get experience, then you can start borrowing money at those types of interest rates. I have a good bit of experience -- and also a decent sized net worth with which I can give a personal guaranty -- and I still often borrow at 10%+, as I want my lenders making a good return.

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Thanks for the heads up, Ned Carey, I'll definitely look into that more. I didn't even consider that possibility since I read about investor's using money partners all the time. Is there some easy way for a newbie like me to get started into REI with money partners that keeps me legal? I did a search like you suggested and have read quite a few posts, but I'm still a little confused. I'll keep reading.

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John N. wrote: Read my post above again. An LLC taxed as a partnership is a pass through entity. The company itself is not taxed. All profits and losses pass through to you personally and are added to your personal return. The company files a form K-1 which tells you how much your share of the profit or loss is. As a rule taking out $50 a month is NOT a taxable event. It is also not an expense to the company. IF you set up a C-corp what you say is true and you would be taxed twice. Your CPA can give yo more details. Dwight Bradshaw what you are suggesting above would most likely be considered a security and subjects you to security rules ie. your investor is passive and you are doing all the work. People do that kind of arrangement all the time, just be aware there is the potential to get into trouble with it. If you want to research it there is a lot written about securities rules here on Bigger Pockets, much by Bryan Hancock

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Thanks Ann Bellamy! I like that approach. It doesn't seem outrageous to me at all. I could see myself starting out at 50% of profit and a determined interest rate on the down payment that they provide. Then maybe as I gain experience I would reduce the percent of the profit that my money partner will get as long as it's projected to still be a really good deal for them. Like I said, I want my partners to all feel like "Wow! This is a great deal for me!" And I would like to WIN financially as well!

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If we are a money partner putting up all the money, even if the other partner (the rehabber) is very experienced, we are getting 38-50% of profits. And a minimum interest return if the profit doesn't materialize. So I would suggest you offer 40-50% of profit, and the money partner holds a first mortgage with a minimum interest rate. Of course, I'm coming from the money side. The person raising the money will see it very differently and may think those terms are outrageous. For a long term buy and hold, I'd need to know the other partner very well. And of course we assume John N. has known his mother for a long time. :-)

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Ann Bellamy that makes sense. And I really would want it to be a win/win. Are either of the other two options enticing to you, or would you have a different and better way to make the offer appealing? I do recognize that with experience I probably will gain more because I will gain trust with finance partners due to my track record. So, do you have a suggested way for me to structure on my first deal, and then a different structure after I've done 5 deals or so? John N. - I definitely don't want to hijack your thread, but am thinking that the responses to even my scenario would help both of us think of ways to do this. The primary difference between us is that I'm not doing this with family members probably. That might make me want to do it differently...but then again if I'm setting up a win for my money partner...maybe not.

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Chances are she knows what she would like out of the deal. The hard part is surviving while all your time goes into the house. If you put in as much as the purchase price then you are in for twice the price. Analyze to be sure you can't purchase already fixed up for same or less. Don't over build for the area. Lots of investors overspend and finding someone that did can be a better deal. If you can have bids showing what the work you do is worth and then you can decide how you are to be compensated. Be professional and keep track of your time. Better too much info than not enough. For you to build equity means you don't take money out, at least short-term. If you can get by and think long-term this could be a great program. Good luck.

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John N., if you and your mother are partners, the income is taxed to each of you whether you take it out of the LLC or not. It is taxed when you make it, not when you take it. If, however, the LLC pays you a salary to manage the property, then that salary is an expense to the LLC, thereby reducing the taxable income, and is income to you personally. I am not an accountant, and if you are going to start working in real estate and LLC's and partnerships, you are going to need one. Especially since there may be circumstances in your personal situation that change what I just said. If you PM me, I'll connect you with a good accountant.