Partnering up with a friend on our first deal

[Oliver Lazaro]

I'm thinking of doing a deal with a good friend of mine. We both know how to do most of the work, but it would mostly be him since i have another job that takes up a lot of my time. I would be basically funding the rehab since he had already purchased the property a couple months ago on his own before we spoke about partnering up. Property was bought for around 45k ( that he paid out of pocket) and probably needs around 20k-25k for rehab. 

 I just need advice on how to split the profit or losses if any ?

Do we need to create an LLC or would a contract be good enough ?

What would be the best thing to do in this situation ?

Thanks

[Bridgette Delva]

HI @Oliver Lazaro the most risk adverse step would be to consult with an attorney and draft up a contract with them; this would be the most conservative way, to ensure neither party will lose and all risk is managed.  Of course, the least conservative way would be to have no agreement (which I would never recommend).  For our first investment partnership, we just used a loan template doc that we found online and personalized it to our terms then signed (with notary).  This is a legally binding doc and if it ever came down to it, it would be enforceable in civil court.

As for how you could structure the deal - that's totally up to you two.  If you're only looking at it as a loan then you'd want to simply charge interest on your money; something like 10-15% for private money. This method would ensure you get your money back independent of how the deal turns out.  You would set a repayment term and repayment amount (lump sum or installments).

If you want to benefit from the profit on the flip, you could simply say you want your loan amount in full plus "x" percentage of the profit.  Since he put in 45k and you're possibly up for 25k, rough math would say that you'd be up for ~35% of the profit.  This also ensures you get your money back in full but could also benefit from the profit.

Of course you could do a combination of the two (anything in between) where you still charge interest on your loan AND you share in the profits.

The way you craft the financials is totally up to you guys and what you feel comfortable doing.

Hopefully that helps. 

**Please note that I am not an attorney and have no training in law so these are just suggestions based on experience.