How to structure a flipping partnership?

Question

Starting to flip with a young go-getter. I put up all the cash and he does all the work. What's the best structure for such a partnership: liability, taxes, avoiding commingling with other deals, expense tracking, etc. Should I structure each deal as a loan? Should we set up a separate development company LLC with insurance etc? I'm more concerned with avoiding mixing funds with his other deals and more concerned with real estate ownership liability than safeguards against misuse of funds. In other words, setting a deal up to look like a note might be perceived as a partnership if the net is split evenly in the end. Use joint checking and credit card accounts? Or wire draws to his accounts as needed? So what's the best structure?

Account Closed · Answer

@John Clendenon If you're not going to be actively involved in the rehab at all, id definitely just set it up as a loan. You get a 1st lien position on the property, demand note, a JV agreement outlining duties and responsibilities of you and your partner (more his responsibilities to make sure you get paid back), and have him add you as additionally insured on the insurance policy. If you're doing a 50/50 split you need to be actively monitoring the costs/expenses. But if you're just providing the funds as a loan, it might be easier to just set yourself a flat/fixed rate of return and be hands off. I would avoid joint accounts/credit cards unless you know this person very very well.. and you're planning on actually going into business together..even then. I would set up an escrow account and have a draw schedule that you approve. Giving a partner access to your cash is a bad idea..ask me how i know ;)

Jessica Zolotorofe · Answer

Hi @John Clendenon. I would suggest an LLC. Within the LLC, you can structure either way, either you have a percentage interest based on the fact that you are putting in the money and he gets whatever percentage you agree upon which would compensate him for the work he does, and then profits are split accordingly. The other option is to take a smaller percentage interest, but make actual loans to the company that have to be paid back with interest before there are any profit distributions, and you can them take a mortgage on the property (assuming you don't need conventional financing, as well). Either way, you would need a strong operating agreement setting forth who contributes additional capital if it is needed on a project after you put in the initial cash, distribution of profits, who manages day to day, who can bind the company in contracts, lien the property, negotiate financing, sell the property, etc. As far as your concerns, there should be a separate bank account for the LLC and for any withdrawal not a specific budget line item (if you're renovating), or not a recurring monthly expense (if you hold and lease out), or maybe over a certain dollar threshold, checks and withdrawals require both of your signatures. The operating agreement can also require that he provide you with monthly operating statements and anything not an ordinary expense you need to approve in advance. If you prefer, you can strictly be a lender with a lien on the property for whatever funds you contribute, or allow him to draw down money, like a line of credit, but then you won't own the property or have any rights to the profits that exceed your repayments with interest. Hope that helps some! Happy to discuss further if you want to message me. Good luck!

Ian Green · Answer

Hi Account ClosedI would be interested in touching base with you to learn about your recent results in Clearwater. Perhaps we can work together on something. I am looking to get started and have some capital I can contribute.Ian

Ian Green · Answer

@John ClendenonI would like to hear more about your current flip. I am from Lakewood Ranch. I am looking to get started in the area.Can I send you a PM?Ian

John Clendenon · Answer

Sure John W., lets meet.

Jessica Zolotorofe · Answer

You don't split profits if you set it up so you are just a lender and not a member of the LLC, but you can get interest on your loan that gets paid back by the LLC before any distribution of profits to the actual members.

John Clendenon · Answer

Great points. I will get additionally insured - I should have thought of that! So my atty says if we're splitting the net then its really a partnership regardless if it looks like a note. Lender's don't split profits. That makes me liable for real estate liability like accidents, flaws, liens, etc. Probably can't have it both ways, but just curious how others have handled this.

Bill Hinshaw · Answer

I have experience with this situation. We are structured as an LLC, with a checking account and credit cards tied to the LLC. Trust is key. Your partner will need freedom to write checks or use a credit card for paying subs, buying materials, etc. You'll need to watch it closely without injecting delays in the process.Another thing you might consider is to do each house from a unique checking account. Same bank, same llc, just a different checking account. This will help you track expenses for each house a little easier and will prevent co-mingling of funds. The cash I put in is treated as a low interest loan to the business. My partner has no equity in the business but gets a split of the profit from each house. This needs to be spelled out clearly in your operating agreement.Are you guys doing a 50/50 split? Are you doing all cash transactions? I strongly recommend you think through your split vs what each of you is putting into the business. If you are putting 400k into a house, and your partner is putting 4 months time into the same house for the same profit... that is an inequitable situation that might be difficult to maintain long term. Now, if you're only putting 40k into the house and your partner is putting in 4 months... now you're getting closer to a 50/50 split of resources, and thus a 50/50 split of profit.These are just my inputs as someone in a similar situation. I am not an attorney or accountant.