How do I structure this partnership?

Question

Hey BP! I have been trolling this site for a little while now, learning and saving money. I now have an opportunity to start doing some deals with a partner. We are looking to do a few flips at least in the beginning to build up some money. I would act as the GC, do the work and would bring the money to do the rehab. They would buy the house with cash most likely. Possibly a loan. We are looking to buy a house for ~$60k that would resell for ~$100k. (Just rough numbers to give yall the idea.)

So, how do we structure this? Our initial thoughts were to get estimates from several GC's to see what they think the whole rehab would cost and assign that value to me as the percentage of the deal?

EX:

- $60k purchase price, holding costs, etc. (Partner)

- $20k in material and labor (Me)

- Total investment: $80k

- $20k/$80k = .25 or 25%

So I would be cut in for 25% of the potential profit.

What do yall think? Have you used any other structures? Does the above seem fair for both sides?

Thanks so much in advance.

Bryan O. · Answer

It seems to me like you only need a lending partner. You are doing all the stuff, your partner is just bringing money to the deal.

In this case, I would structure it pretty much like it is: a private money loan to you while you flip a property. He is your lender, secured by the property. You are the flipper.

In this scenario, you would pay him whatever the loan terms are, for example: 14% interest only monthly payments until month 8 where you cash him out after selling your flip.

Stuart Birdsong · Answer

Bret, I would first ask my potential partner if they are going to be paying in cash, with their own money, or are they getting a hard money loan? If they are financing any portion of that 60k, I would run your ratios based upon those numbers, to protect yourself. The reason I mention this is if they are taking a 90/10 on the purchase amount, essentially a 54k loan and 6k of their own money, then paying 10% on the money (interest only for this example). Their investment is 6k + 450/month until completion. If the project takes 6 months, they have a total of 8,700 invested. Now from your side your true investment should just be material costs. You have roughly estimated 20k material & labor. my guess is material is roughly 50% of that so, 10k is your investment. In this scenario, on an equity% you have 53% and partner 47%. I wouldn't recommend trying to make the net split according to those numbers. I explain it this way so that you can see how someone could take advantage of you, stating that they are on the hook for 60k when really all they have invested is 8,700.

In regards to a partnership agreement, make it very clear and sign an operating agreement that explicitly states your responsibilities and investment( have a lawyer draft it up, no matter the expense). Make sure that you both agree to the terms before take the project on so there are no hard feelings upon conclusion. Hope this helps!

Stuart

How do I structure this partnership?

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