Strategy with cash investors via OPM (other people's money)

[Sean Yuan]

Hi all, I am getting to a point where I would like to start scaling my portfolio but cash reserves of course come into play. I have a few people in my network that would like to contribute cash for a % equity of the return on a flip/rental. My question is, how does one go about setting this relationship up?

• Do I have to add them to my existing partnership/llc?

• (The big one) Come tax time, how does this get recorded?

Simple example, my brother wants to go in on a property that my partnership (3 individuals) is going to purchase. We would probably have some equity split based on cash contributions from each person and some additional sweat equity baked in. But would my brother just wire me the money and I keep the contributions through the partnership? How is this documented for when payouts from rental income comes in? Of course I could just manage the money and send him the appropriate amount but what about when tax time comes and he needs to report his additional money that he has coming in?

Any insight on what y'all have done would be amazing. Thanks!

[Annie Dickerson]

@Sean Yuan It sounds like you're looking to do a joint venture partnership, with everyone having some capital invested and an active role in the investment. If you have passive investors (those who just put their capital in and don't have any active role), you would need to put together a syndication, which is a whole other ball of wax.

The best way to set this up would be to create an LLC for each investment. You, your brother, and any other partners would all have ownership in that LLC. That LLC should have its own bank account and bookkeeping and would be on title as the owner of the property that you purchase.

As for tax time, an LLC is a pass-through tax entity, so each of the LLC owners would pay taxes on their share of the profits and losses. Each LLC member's share of profits and losses should be set out in the LLC operating agreement. (I'd also highly recommend consulting your own CPA before you set any of this up.)