Flipping Partnership - Structuring Advice

[Kim West]

Hello All, Thank you for your contributions to these BP discussions...Truly helpful information for a newbie investor like myself. 

Through networking I have been offered to partner on a flip with a real estate agent/contractor. She (yes, a female!) found the deal, helped me lock it up and will run the rehab since she has been flipping for 2 years already. I am thankful just to have found a (seemingly) deal, as we are in a very competitive market here in Las Vegas. 

We are meeting in a couple of hours to comb through the ARV, rehab numbers, etc. to make sure this is really a deal. We still have time to back out. That part I am not worried about.

So my possible partner brings a lot to the table. What I bring is 18+ years of interior design and construction project management experience. I also am buying the property, handling the accounting and payments for it all, utilities set up, etc. We have a mutual RE agent friend who will sell it at 1% commission, as she brought us together. My partner and I have a 50-50 split of net profits in mind, but a formal contract has not been drawn up, yet. I hope to draw this up in the coming days. So, if anyone has advice for what to include in this contract, please chime in!

Some immediate questions I have are: Do we include my partner's RE buying commission as part of our profits? Do I include my cost of money as part of our expenses (the amount my money would be making in my usual investments, had I not locked it up in this project)?  Do I have construction receipts submitted for reimbursement? How do I pay our construction labor? Do I have money sit in a separate bank account to draw from?

I don't want to split hairs, but I do want to protect each of us and have it stay positive.

Thank you! 

--kim

[Greg Dickerson]

@Kim West the best thing is to for you and your partner to discuss and agree on all the major details then meet with an attorney to put the partnership agreement and legal structure in place. You will also need to met with your accountant to make sure you structure everything the best way for your tax situation.

You will want to set up an LLC for your partnership and to operate and manage the property LLC. Each property should be held in a separate LLC but again the all depends on your attorney and accountants advice.

If you both agree the commission should be included in the deal its best to reduce the purchase price by the commission amount instead as the commision will get taxed as ordinary income to your partner. 

If you are using the commission as a discount for the benefit of the partnership then you should not charge for using your cash. The profit split will be your return on the cash.

If you borrow the funds then interest would be paid as part of the cost of the project. 

You will set up a bank acoount for the operating company and pay for all the construction costs with this account. You ned to get a thorough, detailed and itemized cost estimate with draw schedule form the contractors.

Do not pay in advance for anything. You can pay as soon as the work is complete and you have inspected if they are reluctant to start without a deposit bu do not pay in advance.

Make sure to get lien wavers from all contractors and suppliers as before you pay them.

There is a lot more to the process depending on the overall scope of work. Main thing is to make sure you have a clearly defined scope of wok and you lay out clear expectations of what you want done and when it needs to be complete.