Partner with contractor 50/50?

Question

I am in the beginning phases of putting my business plan together. My goal as far as an investor is to acquire a few houses both SF and or MF then start to get into buying and flipping houses. This is just a thought I had:

My question is, is it smart to have a contractor as my business partner and split profit 50/50? Or some other % we work out? Or should I deal with contractors on case by case basis and then pay them? I have a friend that I completely trust and would have no problem going into business with him. He is a contractor that does amazing work. I am not so good with that side of things but can help out here and there and am willing to learn to do more.

So basically, if the contractor has skin in the game as far as the business goes will that be an advantage or disadvantage?

Stephanie Hess · Answer

I have done many business deals with friends and family and a word of advice, if you plan to keep him as a friend don't partner up. it will seem amazing and really awsome at first but it almost always turns into a disaster. Then your friendship is gone right with it. I have tried and tried to many times to help friends and family and it never worked out in the end. I regret every bit of it. if he is a partner in suggest you obtain a differant contractor. It will save your friendship aswell as your business. Best of luck. Blessings!

Darrell Shepherd · Answer

I do this pretty regularly in other markets.  I run my own here in Georgia and fire contractors pretty regularly.  Its a daily pain in the ass dealing with those people.

I'm not anywhere near where I was before the crash, but am at a point in my business where my time is worth more than squeezing every penny (or ten grand) out of every deal, and I'm perfectly willing to pay some future profit to cut down on my frustration level, especially if it cuts down on my time involved.

I've also done deals with friends many times and never had much trouble, but my friendships are solid and I value relationships over money in a big way so don't sweat the small stuff and address the big stuff before it gets to be a problem.  It is important to write down expectations and money splits and such as detailed as possible, though.

I'd actually recommend this for starting out.  If you dont have a construction background you will find that fixing a house is not as easy as they make it out to be on TV and that every contractor out there will rob you blind if you dont know what stuff should cost.

I've always had a pretty hands off management style so like to have "interests aligned" with the people working for me.  If you hire a guy, he gets paid more for finding stuff to fix.  If you partner with a guy, he gets paid more for finding cheap solutions...Guess which jobs go smoother.

Linval T. · Answer

@Greg Maden

Welcome aboard the vibrant BP community. You already have some experience and with additional effort, will quickly climb the REI ladder to its pinnacle.

While you wait for feedback on partnership, below are a couple podcast on this topic to listen to in the meantime.

https://www.biggerpockets.com/renewsblog/2015/06/18/bp-podcast-127partnership-acquire-and-manage100units-james-wise/

https://www.biggerpockets.com/renewsblog/2014/11/06/multifamily-investments-partnerships-curt-bidwell/

To be more successful, you simply have to work on the other elements to progress your REI pursuit. Below are some quick links to get engaged on this site.

• http://www.biggerpockets.com/starthere
• http://www.biggerpockets.com/meet
• https://www.biggerpockets.com/alerts
• How to Use @Mentions on BiggerPockets
• https://www.biggerpockets.com/rules
• https://www.biggerpockets.com/terms
• https://www.biggerpockets.com/invites
• https://www.biggerpockets.com/perks
• https://www.biggerpockets.com/forums/categories

REI books suggested by BPers

http://www.biggerpockets.com/renewsblog/2013/04/14/best-real-estate-books/?utm_source=search&utm_medium=internal&utm_campaign=books

Simply, bone up on the areas that you need to expand knowledge in such as, Forums, Marketplace, Learn, Network, Analyze and Resources.

Feast on the Podcasts, #askbp Podcasts, blogs and webinars

Lastly, this site thrives on interactions and as such we encourage two way exchanges and look forward to educational and thought provoking ideas relevant to REI.

Jonathan Godes · Answer

I have done this several times from the money side and it has never worked out. If things go bad, it is very difficult to fire an equity partner. They are also motivated to pad their labor invoice and up-charge the materials, since they get 100% of that side upfront, and it only costs them 50% on the back end.

If they are flush with work at a certain time of the year, you are going to get the contractor's scraps as they hire out subs for everything and rarely check in on your job. If it is slow time for the contractor, you will find that there is a lot of tedious labor charges the partnership is getting billed for. Not to say this is the rule, but the incentive is not aligned with the partnership.

Christian Lincoln · Answer

"What you may be going through is what I am going through now- should the contractor be paid for his labor as an expense in the project that will be reimbursed before we split the profits. If so, I'd argue I would need a finders fee for getting the deal, a % for project management etc. It could get messy. Don't want to hijack your thread, but I'd be interested to hear what others thought about that."

Any thoughts? Anyone? Does contractor deduct any of his labor costs at sale of flip? (other than a helper and materials of course). Fuel? Discounted hourly? Trying to set something up now.

Aref Shehadeh · Answer

Going through this now with a contractor I worked with on a flip, things went well so we're looking to scale up the operation. I kind of took the role of GC in the first flip- hired two GC's to do much of the work (one of which I'm partnering with), subbed out other pieces of it. Learned a ton.

I'd rather pick up a pen than a hammer, but this experience gave me better construction literacy. So, since we're truly partnering for this next one (50/50), I can understand and keep an eye on what he's doing, though he's ultimately responsible for the construction side. I also spent time figuring unit costs for materials and scope of work for the different trades. So, as "CFO" I will be able to understand expenses and question when materials get costly. You should have a baseline understanding of typical unit costs, so as to not leave it all in his court, which could get risky - (maybe he'll want to make money on it on the side...). Receipts help with this as well.

The advantage is simply segregation or ownership of duties, assuming all roles are understood and on paper. This will allow you to look at future deals and keep on eye on the health of the projects, while the contractor can focus on construction and meeting deadlines.

What you may be going through is what I am going through now- should the contractor be paid for his labor as an expense in the project that will be reimbursed before we split the profits. If so, I'd argue I would need a finders fee for getting the deal, a % for project management etc. It could get messy. Don't want to hijack your thread, but I'd be interested to hear what others thought about that.

Logan Hicks · Answer

@Jason Le

As a private money lender myself, if anyone offered me a meager 6-12% for a 6+ month project Id openly laugh at them while shredding their paperwork.

Russian T Notes pay 14%, are backed by 400B USD, and another 6Trillion in other currencies.

REI is a major risk, especially in this market for flippers. The odds of selling fast are low, projections are often wrong, surprise costs cannibalize profits, and permitting processing and costs are getting worse by the year.

@Greg and Darrell

I am currently collecting a pool of other investors like myself to purchase portfolios and MFUs in high population regions if you two are interested. Im on my cell right now, but ill also message you both later.

Taz McDole · Answer

i agree but fimding pml is much harder than u think at least for me. Would love to get any suggestions on this topic

Jason Le · Answer

Are you talking about PML??? You don't really need to split 50/50 if you are looking to find a Private money lender. From my understanding, If you know what you are doing and have a complete layout and blue print of the house you are flipping it shows that you are capable of succeeding, just go out and find one of those lenders and have them take a look at your blue print then they will have confident in investing you. In return you give them 6%-12% interest. In fact you can give them a bonus after to build the bond between you and the PML. So that he would be ecstatic and would most likely work with you again.

Partner with contractor 50/50?

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