Partnership Structure for BRRR deals

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Partnership Structure for BRRR deals

Ben Smith
Rental Property Investor · Austin, TX · Member since 2019 · 19 posts · 4 votes

Hi all,

I'm looking at investing in a BRRR deal with a friend/private money partner. I know that the typical way to use private money for a BRRR or a flip is usually just to borrow the money at a fixed rate of return and pay it back after sale/refinance. However, in this case I'd like to incentivize fully funding the deal by providing 50% of the whole deal to the money partner. I know this is possible, but I'm having a little trouble figuring out the specifics of ownership, profit distribution etc.

1.    Limited Partnership:   It seems that one way it could work from a profit distribution standpoint is to create a limited partnership, in which I am the general partner and the friend/investor is the money partner. In this case, how would ownership of the property itself work? If the partnership owns the property as an entity, would it still be possible to obtain conventional financing for the refinance? (I'm guessing no).

2.    Individual Ownership:   If I own the property individually, it would then be fairly easy/simple to obtain a conventional loan for the refinance. However, in this case, how would we handle profit distribution, especially in the eventual sale of the property?  Is there some sort of entity structure we could use for sharing profits while I still hold title as an individual?

3.     Tenants in Common:   If we own the property as tenants-in-common, is it still just as easy/simple to get a conventional loan for the refinance? And are joint bank accounts all that would be required for the accounting piece? 

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  • Jack Inman
    Attorney · Memphis, TN · Member since 2017 · 130 posts · 104 votes
    7y

    @Ben Smith I'm in the process of doing a similar deal. I sat down with a closing attorney, and the advice I was given was to set up a two-member LLC with an operating agreement that lays out the terms.

    My understanding is that you can get a conventional loan, but it will be a recourse loan. So, if the LLC was to default on the payments the bank could come after either of the members for the full amount of the loan regardless of the member's percentage of ownership.

    I'd recommend talking to a lawyer.

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  • Scott SmithPro Member
    Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
    7y

    I would also recommend chatting with a lawyer. The option that gives you most control (in the form of an operating agreement) as well as protection offered would be using an LLC. An experienced attorney can help you put together an operating agreement that can go over how the partnership works and what should happen if you run into problems. You can also read this article to get a better understanding.

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  • Ben Smith
    OP
    Rental Property Investor · Austin, TX · Member since 2019 · 19 posts · 4 votes
    7y

    thanks for the insights guys.

    @Jack Inman, I'm glad to hear you've found a lender who doesn't have an issue with lending to LLCs. The mortgage broker I'm talking to now mentioned that he's never heard of a due on sale clause being enforced for transferring the property to an LLC after the loan is in place. I understand there's some risk in that but I may consider it.

    @Scott Smith, I of course do fully intend to utilize the assistance and advise of an attorney for this process. In fact, I'm in your area, so perhaps I will reach out to you and your company when I'm ready. That  being said, I'd like to gather as much info ahead of time and put a general plan in place beforehand, so as not to waste your time or my money! Just listened to your podcast episode by the way, great stuff!

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  • Scott SmithPro Member
    Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
    7y

    @Ben Smith,

    In that case, I can lay out how I see many people operate this kind of a partnership in a way that both protects them, meets their goals and allows them to control how the investment is operated.

    Many investors lean toward using an LLC, such as those linked in the article above, in regards to investing with partners. Limited Partnerships are most beneficial to investors who won't reap more benefits from LLCs. Generally, foreign investors will lean toward LPs because they don't need to hassle with the additional fees of LLCs. For those who are investing from within the United States, investing through an LLC starts to outweigh using an LP in the benefits that it offers you.

    You can establish the level of control each partner has in an LLC through the operating agreement, so you can accomplish your goals of a 50/50 partnership between yourself and the "money." It also lays out specific guidelines for certain things that may happen, so you can establish protocol for different circumstances. This means you can have an understanding of how to operate the property AND when to sell or not sell the property in writing - which gives many investors peace of mind.

    You can actually have access to personal financing options while getting the protection offered through an LLC with the use of a land trust. I am hazy on the specifics of the deal you are trying to set up, but let me give you the gist of what this would generally look like. Many investors will purchase the property in their personal name, giving them access to the beneficial financing options of a residential mortgage. After the purchase is complete they will transfer the property into a land trust (123 Main St Trust), which is an excluded transfer from the Due on Sale Clause [protected under the St Germain Act.] This also can offer you a level of anonymity and privacy by removing your personal name from public record on that property, if created correctly. After the transfer is complete the investor assigns the LLC as beneficiary of the trust, and yourself as the Trustee to manage it.

    This means (a) you can operate that investment through a pre-established Operating Agreement, (b) you have the liability protection offered through the LLC, (c) you have access to favorable financing options available in your own name and (d) you also have an additional level of privacy from prying eyes.

    You would want to discuss the loan terms with a banker and let them know what you are thinking in advance. 

    Best of luck moving forward. Feel free to connect with me on this stuff, I work with these entities all the time for a variety of clients - I can help with any questions you might run into.

    This isn't legal advice, just my opinion as a real estate investor.

    Podcast Guest on Show #109
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  • Ben Smith
    OP
    Rental Property Investor · Austin, TX · Member since 2019 · 19 posts · 4 votes
    7y

    @Scott Smith, thanks for the thorough response! I suspect I'll be in touch once I've got a specific deal coming down the pipe.

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  • Scott SmithPro Member
    Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
    7y

    @Ben Smith Always happy to help!

    Podcast Guest on Show #109
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  • Account Closed
    Kalamazoo MI · Member since 2017 · 11 posts · 6 votes
    6y


    @Ben Smith thank you for the post, I am struggling with the same question. Turnkey rentals and flips are relatively straight forward. However, I'm struggling to wrap my head around partnering on a BRRRR, Specifically how the partnership works in relation to the refinance. In my case, I am the money/W2 Employee/loan holder/deal finder/admin partner and I am looking to partner with an experienced General Contractor to fully manage the rehab aspect.

    How does this typically work? As the money partner, I would like to recoup all of my cash investment. Then once the refi is complete, then the equity and cash flow are split 50/50? 

    or perhaps I put in my 50% of the capital and then "loan" my partner his 50% of the capital, so that way once the refi comes through he pays me back? (and then puts in 50% of however much capital is still in the deal)? 

    Any insight on what is "typical" would be much appreciated. 

    Thank you!

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