First Time Flip NJ - Structuring a Partnership?

Question

Hello,

I read some great articles on this app earlier today.

I'm ready to buy and flip my first home. --And by ready I mean, my partner and I have the capital to buy a property in Roselle Park,NJ.

Where do I start?

• Do I buy the property under my personal name or do I become an LLC?
• Do I see a lawyer or accountant first?
• My partner is an experience plumber and capable of doing most of the work/manages a team to do work.  How do I structure a Partnership with this individual?
• I'm assuming we both keep track of our investment into the property (within a budget we set) then that money gets repaid first, then we split the profit 50/50?  Am I simplifying this too much and not thinking of other factors to be considered?

Any advice, articles, or forums links would be greatly appreciated for this 25 year old first flipper who is looking to challenge herself.

Thanks!

Jim Vora · Answer

@Toni Bobko,

If your investing with a partner then i would recommend to create an LLC, but note it might get difficult to get banks to provide loans to LLC unless both of you are ready to be on the loan.

You may have to sit with your partner and discuss the following:

1) are you going to be the investor and he is going to take care of any repairs that may be needed.

2) Are you going to pay him for his time invested in repairs if he is also investing his money?

3) who will take the expenses if the property does not sell for 4 - 6 months?

4) Lawyer might be a better option to consult as accountant may ask you what is your preference.

All the best:

Lynn Hill-Torres · Answer

Hi Toni.

I am sort of in the same boat as you, but further along in the journey.  I'd say yes you are a bit over simplifying. Because your partner is doing much of the labor, you may be underestimating the cost of labor. That is something you should hash out with your partner. Yes he is doing it for free now for the sake of the rehab and profit later on, but why should you get 50% of all the profit  when you didn't do the work.

Here's what I mean. I just had a plumber friend come and install a shower in my basement. At the homeboy discount rate, it was still about $2000 just in labor. The materials were less than $1000. The job took five days. When I bidded it to other contractors,  the price was 4500-10k. Three Grand to add a shower, and upwards of 10k of value to my home is well worth it. However, let's move that to the rehab. How much is his time and labor worth and how much is your credit? That is essentially what you are bartering, if as you say, your role is to get the loan.

If he is not getting paid during the process, then he will need to get his own labor added into the closing/profit money. It might surprise you what he comes up with five  weeks into the rehab. Hopefully he doesn't charge "standard contractor rates."

What I did...because my contractor is also my brother, we (my husband and i) dug deep into our budget, our personal budget, and decided to pay a weekly stipend as motivation. There is an expectation of work to be accomplished weekly as well as a scope of work detailing each task. This helped our familial relationship much more. Cant have Thanksgiving  feeling weird. Because we both knew/know what is expected. And since our small but reasonable stipend ($500/week) doesn't pay all his bills, he still needs to work. So that means, my rehab will not be done in 6-8 weeks but more like 8-10. Someone has to pay the loan, electricity, gas, heat, water, in the mean time. Those are more expenses that are costing me money. But when you have more time than money, it beats contractor rates.

Our deal is: he gets paid a percentage, which we hope will be "contractor rate reasonable" at the table, which we factored in about 25% of what we profit. We used a percentage as opposed to flat rate. Percentage can fluctuate with whatever we profit, cuz the market never goes as I want it to. We are also paying for materials and helpers out of the loan which includes rehab costs.

We chose the route of hiring my brother as our contractor with a delay in full pay as opposed to a partnership. Here was the problem of the partnership:

during some early talks, I realized my brother expected to be paid for his work....which is amazing btw. ...in addition to a split of the profit as a partner. So let's talk real numbers. lets say our rehab has potential to get 100k profit after loan payoff (just playing with numbers here, though I'd love a deal like this). The rehab costs were 15k in materials and helpers (which he paid for)= 85k. He never paid himself, but his labor should've been about 15k... say this is the homeboy discount. That's now 70k left. You split now that number: 35 & 35k. He will get ultimately 65k, and me, 35k. Make sense?

At first I was like, whoa. But it was right. I don't think I could imagine myself handing him 65k of a 100k deal and getting so little. I would think, who's deal was this anyways??

This may not sound right, but I'm only going off of what you said. Also, I'm just making up numbers for the rehab, it may not be that much...or maybe it could be more. My rehab costs are listed at about 17k without paying my brother. And you said your partner would be paying for materials and helpers. I'm just throwing numbers around so that you can get the concept. For us, it made more sense to hire my brother outright instead of partnering. I get it, I need him or there's no rehab. But he needs me or there's no house.

Let's look at Same numbers but we pay for materials and helpers out of the loan and get creative with our funding and we take on the risk of funding the rehab. Here's where the barter evened out a little more. We have a higher loan and used savings but at closing, using the same 100k profit example, I only need to pay my contractor and repayment myself. By paying 500/week , he has motivation to stay committed to the job the whole 8 weeks or so. So say I've already given him $500*8weeks=$4000 pre-closing. At closing, he gets 25% or 25k, me= 75k. He walks away with $29k total, which is better than contractor rates. But I don't have to split the remaining profit 50/50.

and we $75k - (4k labor - 17k rehab - 2 loan payments of $700 each or 1400 total, 2 gas & elec pmts of 200 each or 400)= $18,800 but let's round to an even $20k for expenses...that's 75-20= 55k total profit to me.

So, 35k without the rehab headache could be worth it to you. However, don't underestimate him and his labor. Managing a rehab is hard work and he should be compensated for it. I just wanted you to see in detail the things which sounds like you may be overlooking. If these numbers sounding fine to you, go for it. But always write it down what is expected.

My advice, go on zillow, grab the first house you find and analyze it. Look at the profit and guesstimate rehab costs. 100k is A LOT. Try the numbers at a 40k profit, 25k. 50k. Obviously the rehab can change everything but it shows you what your portion will be. I think the hardest part will be at closing, when you get that fatty 40k check and then ......you have to hand over 30,000 big ones to your partner because he did all the work. It may make you feel some type of way after that. But if it's legit, then I want you to understand why you're only getting $10,000 of a $40k deal. No one wants to feel cheated. Not you and certainly not him. The last thing you want is for him to get three weeks into it and get ticked off over the expectation of compensation and leave you with a half done house in your name. That wouldn't be nice. Then you'd have to get contractors at those nice rates and there goes your profit. He needs to feel like he's winning too.

Got it?

Sorry to write so much but I needed this to make sense, even for myself. Hopefully that helps

Jim Vora · Answer

Toni,

Its not difficult to write up a contract to split everything. if you go to a lawyer who has little experience with dealing with REI then it should be smooth.

the concerns happens to cover the clauses when you are bearly break even and unforseen cost may come into picture. if you open an LLC and reimburst all the cost from one single account, you may be able to keep a track of all expenses. and bottom line profit too.

Toni Bobko · Answer

@JimV7

Thank you for your quick reply! Those are good questions to discuss with him.

I think we both will be investing money into this. From my understanding, he'll be essentially working for free but spending the money on materials and paying those who are doing the work when needed. Those would be his expenses.

I'll be taking out the loan for the property, either in my name or as an LLC.

We both would be keeping track of the money we put into the property, I'm just not sure how to draw that up into an agreement.

After it sold we would pay back our investments first and split the net profit.

I'm worried I'm over simplifying this.

First Time Flip NJ - Structuring a Partnership?

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