Flipping a Rehab with partners

[Toria Ellis]

So myself and 3 others want to partner to flip a rehab just get our feet wet. How do we begin? Do we buy under llc or can we all be on a loan together?

[Scott Sutherland]

I would form an LLC. I'd contact a commercial lender and only have one person guarantee the loan. That person should be able to qualify for the full amount and should probably receive preferential shares of the profit in return.

The problem with having multiple members guarantee the loan is that all members are liable for the full amount of the loan. And if the goal is to maximize the credit facilities of all the members, the best strategy is to take turns guaranteeing the loan on each project. 

Also, you can ask your lender if the loan will be reported on your credit report. Some commercial lenders do not report it which allows you to retain your lending bandwidth for future deals. 

Regarding structure, I have done it a couple of ways (we are 100% cash/no debt):

1. If I'm the GC, I get a 35% bump above my commitment level with an 8% preferred return. That means that if I put in 5% of the investment, I receive 5% of the profits up to 8% and then 40% of all profits above the 8% level. I also receive 1.5% back end commission as the broker subject to achieving the preferred return. In other words, if the project fails to hit the 8%, then I would list the property for free. 

2. If I'm using a GC, I will split my 35% with them and take a cut as the operator. Usually the split is about 50/50 depending on whether the operator receives any compensation along the way. On my current project, our GC receives 17.5% of the back end profit plus a 10% override along the way (cost plus 10 on the rehab). I receive 17.5% on top of my investment.

The passive investors split the remainder according to their input percentage.