How to fix and flip with your partner?

Question

Hi all,

My girlfriend and I are pretty serious about getting into real estate investing, and have quite a few questions about how to do that in a way that makes sense for both of us financially, is done in an intelligent way that protects our assets and helps set us up for the future, and above all allows us to honor our strengths and weaknesses while maintaining a healthy relationship. That's not too much to ask is it?

She has the capital for this endeavor, about 1M, and I'm a licensed GC with a small construction company. I live in Marin county, CA, and she in the east bay. Our idea thus far is to buy a place here in Marin so we can both stop paying rent, and from there get into buying, fixing, and flipping. I don't know that the market is great for it here. It's generally expensive so while I'm sure that there are opportunities, I'm not versed in this game to know how much sense it makes in this area. We'd like to buy a fixer to begin with, that is livable in while we fix it up, to sit on for a few years and sell, alongside doing fix and flips. We are also interested in developing raw land in the area, and creating affordable housing situations. Marin has very little affordable housing.

The challenges in our talks so far:

-How do we set up framework for such a thing? Is it a good idea to create an LLC for buying and selling, to protect assets? I have my small company, and her her inheritance.

-When we theoretically make a profit on a flip, how do we distribute that profit? I'll have to be charging my regular job costs for doing a job, but do I then get a percentage of the sales profit? Or does that go back to her, as an investor? Do we split some between us, and put the rest into a separate entity (LLC)? --I realized that I was maybe initially wrong in my assessment of how this would work, I figured we'd split 50/50 or close to that at the end, but she doesn't think that I should get paid for doing the work, and then that much as well at closing, this is one of the places we really need help, for us both to feel good.

Let's start there, shall we? Appreciate any and all advice in advance, thank you!

Chris Mason · Answer

Hi @Nicholas Tavasieff,

That's a pretty perfect model match that you and her have in terms of what you both bring to the table.

I tend to default towards KISS. Keep it Stupid Simple.

You're a GC and thus the flipper or BRRRR operator.

She's the private hard money lender.

Boom, done, that's it, nothing fancy.

Maybe she wants to be generous with her terms because she loves you, and maybe you decide to kick some of the net profits back to her because you love her, but that's the extent of how complicated I would make it.

Elizabeth Wilson · Answer

@Nicholas Tavasieff - I completely agree with @Chris Mason!  I flip houses with my husband (and we house hack as well).  To be honest that is stressful enough as it is but throwing in the "his" and "her" money element is a completely new level of stress.

I would do my best to treat everything about this deal as if you two weren't in a relationship.  Find average HML terms and pay her accordingly.  She might even want to think of setting part of this up in a self-directed IRA  (I don't know enough to advise on that).

You definitely need to pay yourself for the work you do. Even if it is waiting to make a profit when you sell; you still need to eat. You could even think of selling the property to her when you are finished and she could have a nice buy and hold investment.

Whatever you do write it all down in contracts and make it clean and transparent.  Not saying ya'll won't be together forever but it might prevent some fights along the way.

I love working alongside my husband but there is also an added relationship stress.  (not that we have ever fought over work... ;)

Best of luck! Keep us posted!

Michael P. · Answer

I didn't read any other replies so I have no idea what others have said.

IMO you should NOT get paid to do the work.  You should just split the profits(if there is any) when the project is complete and sold.  Now the split could be anything you guys both think is fair, 50/50, 60/40, etc.

She should 100% own the LLC that controls this property.  100%, non negotiable.  There should be an iron clad agreement(hire lawyers) as to how you will get paid and when.  At the time of closing and funding if there is a profit.  No profit no money, your girlfriend will lose that money.

You're risking your time and she is risking the money.  With that said, you and her should both make 100% certain, at least as certain as can be, that there will be profit at the end of the rainbow.  So do major due diligence on this.

This COULD LEAD TO BREAK UP AND HATING EACH OTHER and Major Resentment if not handled properly.

I would high recommend playing devil's advocate or getting your friends and family to play devil's advocate before you jump into this. You should have everything outlined on paper, film your discussions if needed, that way you both have the ability to point out what was agreed upon.

If this girl is someone you will marry protect your relationship first then worry about this flip.

Austin Fruechting · Answer

I'd say put a ring on her finger.  That'd make all this really simple!

Elizabeth Wilson · Answer

@Nicholas Tavasieff -

I think ya'll are over/under thinking it.

first scenario: you (hopefully) make profit on the sale and she makes profit on the loan  (this is how we work with HMLs all the time)

second scenario:  you make profit doing the GC work (she hires you and pays for labor/materials) and (hopefully) she makes profit on the sale but not on the loan.   (this is how we do when we contract out our GC work but own the house)

First one just seems cleaner because she doesn't have to hire you but just loan you money like she would for anyone else.  HML get great returns (and we are super thankful for them!).  Second one seems like trouble.  Or at least it would be for me.

And it might not be 50/50 and that is okay.    There is more of a risk in flipping than in lending (typically) so you might make more but you also might make less.  Just work with a title company and make sure it is all in writing.

I'm sure there are others on BP who have worked out a partnership which is based more on 50/50 split; I just think yours might be more complicated because it isn't just a business relationship.

my 2 cents.

Nicholas Tavasieff · Answer

@Chris Mason and @Elizabeth Wilson thank you. I certainly agree, and that has definitely been a part of our discussions, to keep it simple, and to keep everything clear and in writing as well! I'll run this all by her. It does seem like this could be approached in at least two basic ways, which is what the discussion is about thus far:

One is that I'm the one doing the buying, fixing, and flipping, with her being the HML and getting a return on her loan.

The other is that she is employing me as the contractor, and she is the one doing the buying, subbing out the fixing (to me), and flipping.

So in the first scenario, I'm making the profit on the sale; in the second, she makes the profit. We don't know how to resolve that. Which is why I initially suggested 50/50. Am I making this too complicated?

Jo-Ann Lapin · Answer

Wow you have a perfect skill set to come into the business of flipping or holding. I really would seek the advice of a CPA that specialize in this space. Look up Amanda Hahn she might be a great resource for you.

How to fix and flip with your partner?

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