Profit Split

[Linda Sewell]

I'll apologize in advance if this question has been talked about over and over, I'm new on this forum. This is my question:
My husband and I own a construction company and of course things have been very different for us the past few years. We have a couple of people interested in investing their money with us on some rehab work (flips). Because we've been in business for ourselves for over 35 years we have not had profit sharing to consider aside from employees. Now, we will be searching and assessing to determine the safest and most profitable projects to invest their money and all of our time. We will be performing most of the labor ourselves and when we do need a trade we will call on one of ours. We know the inspectors, have the license, have the insurance, etc. They will be giving us the money and letting us run with it basically. We currently have several LLC's and the thought of more, to be truthful is not my first choice as this means more bank reconciliations, more tax returns, etc. However, I know this is the best choice to reduce exposure to liabilities.
We of course feel we're deserving of more of the profit but would sure like to hear your feedback on this subject as well as options to more LLC's.

Thanks in advance,

Linda

[Jon Holdman]

You have several options.

One would be to have your investor loan you money into a specific project for specific terms. "Hard money" loans for this sort of stuff typically have terms like 3-6 points, 12-18%, and 6-12 months with interest only payments. "Private money", which is really what you have on the hook, is often willing to take a somewhat lower rate, perhaps high single digits and only a point or two. If you can get that, its very likely to be the cheapest (for you) and simplest approach. You borrow the money when you purchase the property and give the lender a deed of trust with the property as security collateral. When you sell, you pay off that loan. You might even find someone who will let you defer any interest payments until you sell.

Another alternative is a "money partner". In this case, the investor puts up the cash, you do ALL the work (find it, buy it, fix it, show it, sell it.) Then you split the profit 50/50. On a decent deal, this is very likely to cost you more than even paying several points and double digit interest rates.

A third alternative is to have someone invest into your company, then use the money to do fix and flips, and pay the investor(s) a dividend from the company. In this case, reconciling a checkbook and doing a tax return is the least of your worries. When you have investors like this you are "selling securities" and you fall under SEC and state regulations. You will have paperwork and legal filings to do. You will need to create a new LLC (most likely.) You'll need an operating agreement and private placement memorandum. You may need to do filings. There's a Syndication Group that deals with some of these issues.

You have the additional complexity that you're actually doing the hammer-swinging. You would like to be paid for that, I assume. In a normal fix and flip, the labor is part of the expenses. So, the flipper might spend a chunk of the total investment on labor, then split the net profits 50/50 with an investor. In your case, you're doing the work and so your costs will be lower. The net profit is larger, but the investor takes 50%.

By far the simplest and cheapest option will be to just do a loan.