Question on forming a JV with a friend

[Jeff Caravalho]

Hello BP, I've tried this post on another forum; no response, maybe I was in the wrong forum:  

My dad & I are considering entering a joint venture with a good friend of mine who is an GC.  We would like to flip to earn capital for future buy and holds.  We plan to use an investor agent (screening now) for buying & selling, at least initially.   My questions are: 

1. Should we form an LLC or just do a joint venture since this is our first flip. If LLC, can we do it in another state since CA is so expensive.

2. Should we split the profit 3 ways or should my dad & I get a higher percentage since we are putting up HELOC money (dad 120k, me 80k). Also, I plan on spending 15-25 hours a week on the flip myself (I'm pretty handy).

3. Should we just pay my contractor friend his rate and go 50/50 with my dad? We've all heard the saying," A partnership is the hardest ship to sail",  & I don't want to go down in high seas with my dad & a good buddy. 

Thx for your input BP!  Kicking myself for not finding you earlier.

[Scott Lewis]

Hi Jeff, 

My partners and I partner with our GC all the time for deals. My recommendation to you is for you and your dad to set up an LLC for yourselfs; call it Caravalho, LLC and set up a separate LLC for this deal where Cavavalho and Contractor, LLC are partners. This gives you the maximum amount of protection and allows for both partners to easily exit this deal. Also, you will see that every deal is different and conditions often change deal to deal.

As far as the equity split, DO NOT JUST SPLIT THE EQUITY evenly JUST because there are three partners. I'm a professor of Entrepreneurship at a university and one of the first things I teach my students is that partnerships are almost NEVER equal. You and your father need to have a serious chat about the equity split of your LLC. If he is contributing more money, but you're spending more time, then maybe a 50/50 split works.

But I can tell you this, based on what you've described above, if your father is not contributing time, the difference in initial capital is not significant enough for you to feel, over the long run, that a 50/50 split is fair.

As far as the JV, if your contractor is delaying his profit until the end of the deal and it's based on a percentage of the profit, then an equity split in a JV is beneficial to you and your dad. If he isnt, then just use him as a contractor.

One sticking point and it's something my investment group is always fighting, is if you're setting up a JV and the contractor is getting an equity position, then he has to honestly give you his costs so that your can accurately calculate the profits in the deal.

Take a look at your deal. If you need to spread risk because the ARV could put you in a bad spot and there isnt enough profit in the deal to GUARANTEE a good pay day, then an equity split JV with the contractor is a good deal. Otherwise, just pay the contractor as a contractor and dont worry about the JV.