How to structure partnership for BRRRR with cash partner

Question

For my first deal there is a good chance I will be partnering with my GC, who is also an investor. He's flipped many houses successfully and has a solid history of estimating the rehab costs. We're looking at a SFH to fix and rent together, both as an investment and a learning opportunity for me. The reason we want to rent for at least a year (instead of flip) is to get past the short-term tax hit.

Here's the good news: he can finance the entire purchase and rehab with cash.

My question: What is the best way to structure the partnership from the money side, assuming I have very little available to put in up front?

I would like to have some creative solutions to bring to the table rather than put the onus on him (although he has done many partnerships before).

For example, would it make sense for him to take a note back and a lien on the property to cover my 50% (e.g. interest-only, 7 or 8%) during the rehab, then convert to a traditional 30-year payment (with him) or re-fi my portion (with a lender)? What are the implications of re-financing since the property would be in both our names (or our 50/50 LLC) if I didn't hold up my end (would he just buy me out)?

I'm thinking we would split everything from buy to rehab to expenses and rent...and eventually profit from the sale.

I'm not trying to make this too complicated, but it would be my first such arrangement, and I'd like it to be right from the start and of the utmost integrity.

I value your input as experienced investors in the BP community...thanks!

Chad Rider · Answer

Hi Philip,First, congrats in getting to your first deal! Still working on mine.If he is 100% funding the project and doing the work (as the GC) what exactly are you bringing to the deal for a 50/50 split? Please don't take that the wrong way. I am not questioning the arrangement you have, I'm just trying to understand better the individual contributions. Did you find the house and get it under contract and bring it to him?

Michael Noto · Answer

@Philip Pape If he is providing all of the money, coordinating the rehab, and bringing all of the experience I think you should pretty much be OK with whatever structure he wants to go with and use it as a valuable learning experience.At minimum If I were in his shoes I would want you to be a personal guarantor on the refi side, deal with the back end selling of the property, and to deal with all of the day to day maintenance once stabilized to even think about giving you 50% of the deal. If I am him I would get the place rent ready and hopefully not hear about the place again until it is time to sell.Not trying to come off like a jerk and I hope I'm not but it sounds like he doesn't really need you to make deals happen at this point, but you need him. The way I learned REI was through a very similar setup with a partner and I dealt with all of the crap, but you know what? That was my value proposition at the time and I learned a ton.

Ryland Taniguchi · Answer

Not clear on the details of this here. 1) Is the GC putting 100% cash or are you getting hard money? I would finance under your name and be the personal guarantor as part of your contribution.2) Are you asking whether the GC would put a mortgage on the property in the amount of his cash contribution? This was not clear how you are trying to structure.

Chad Rider · Answer

To have your GC fully finance your first deal and take you under his wing is worth its weight in gold. That is terrific and wish you luck! I wish I knew someone like that! :) I'm probably not the best person to advise you on how to setup the financial side. I would just make sure that you think through and discuss all possible aspects. What if the rehab goes over budget? What if you can't rent it right away? If you were both funding 50/50 the natural assumption would be to just split the overages. But that's not the case so just make sure there is a clear understanding of how things will play out if things don't go as planned. Good luck and please let us know how it goes!

Chad Rider · Answer

Sounds great Philip. Looking forward to hear how it turns out. Best of luck!

Philip Pape · Answer

@Michael Noto, it will likely be secured debt against my bank assets or borrowing on 401(k). Worst-case we'll go in on a hedge fund construction loan and re-fi after seasoning. Either way, I can do a cash-out home equity mortgage after close (and I'm willing to wait 6-12 months if seasoning is required, though my local credit union said they have no seasoning requirement).

Michael Noto · Answer

@Philip Pape When you say "I will obtain financing for the acquisition" are you doing so with a HML? If not, how?Structure looks good to me. The bottom line with the structure of the deal is for the people involved to be OK with it and for you to trust each other and know you both have each others best interests at heart. Who cares what anyone else thinks, right?

Philip Pape · Answer

@Chad Rider, @Ryland Taniguchi, @Michael Noto, @Steven Bibbs, I appreciate your advice and wanted to provide an update.We are under contract for my first potential deal! It's a $35K purchase, $45K rehab. ARV is $150K. Rents are $1500K. 3 bed, 2 bath SFH.The way we're going to structure it is I will obtain financing for the acquisition plus $5K of the rehab, and my partner will take back a second lien at close and finance the other $40K of the rehab. That results in a 50/50 split ($40K each).He will be GC and manage the rehab on the ground. I will handle all the back office work (paperwork, accounting/receipts, orders, phone calls, LLC documentation, bank account stuff, etc...) as well as tenant marketing, screening, and monthly accounting. He will show the property for tenants and handle maintenance calls. I've also offered to put together the SOW and handle relationships/meetings with business associates (accountants, lawyers, agents, etc.).I think it's a good split since he's an expert with rehabs, and I'm good (and efficient) with technology, accounting, and planning/organization. The rehab is a 4-5 month job, so he will be spending lots of time at the property. I work a full-time job but will spend 5-10 hours at the property each week, but most of my other time will be the back office stuff.Does this all make sense, both for the financing aspect and the work split?

Steven Bibbs · Answer

paper work signed and dated by three parties is key

Philip Pape · Answer

@Michael Noto, I couldn't agree more and appreciate some of your specific ideas about defining my roles. I'm happy to do whatever it takes in time and effort on my end, including working on the rehab in addition to everything else. Having said that, I might also consider just financing my half anyway but we'll see what makes sense.