Advice on business arrangement as investor for home flipping

[Tim Rector]

I have been looking into diversifying into some passive income from real estate.  I have $120k in company stock which I liquidated this year since the stock is trading at all time highs and next year isn't looking good for the company.  I have renovated a few properties in the past and rented out, but I don't really have the time to do this since I am employed full time as an engineer.  I was talking with a friend (I've known him for 10 years) at my church who runs construction crews for someone who flips properties.  The way the arrangement works is:  1)  The business owner researches properties at auction and selects properties which can be turned for a profit.  2)  There are a pool of investors who have money available for purchasing the properties from auction and cover the renovation costs.  3)  My friend (from church), reviews the property and gives an estimate for the renovation and one of his crews completes the renovation on the property.  4)  The business owner then sells the property and returns 10% return on the investors funds used.  The business owner flips between 12-18 houses per year.  My friend has worked with the business owner for a number of years and has a good working relationship.  In fact, he said that he works with the business owner on a hand-shake model.  My friend spoke with the owner and he is looking for an additional investor since another investor recently dropped out.  The business owner recommended that I provide my funds to my friend to keep in his account for using towards the home renovations/auction purchases.  My friend mentioned that he could write up a contract stating my funds provided and agreed upon 10% return on investment for each property flipped.  As I understand, the agreement is that I don't review the properties as that is left up to the rest of the team.  The investors provide the funds and the rest of the team handles the property selection, renovation and selling.

My questions -

1)  My friend asked me what I would like included on the contract.  Suggestions?  Should I request a statement from the proceeds on each flipped property?

2)  Any other questions I should be asking?  Any concerns?

3)  I assume that as long as I roll the investment returns into another property flip, the taxes can be avoided.

Thank you.

[J Scott]

Has this flipper created a fund that is compliant with SEC regulation and is legally allowed to pool investments from multiple investors?

Or is the flipper using a single investor for each property that he purchases?

If it's the first model, then you can likely defer taxes, but you will have no real collateral or security to protect your investment. If it's the second model, then you should be able to get a first position lien on the property to secure your investment, but you will not be able to defer gains from each investment.

If it's any other model -- for example, he's pooling money without SEC compliance or he's using a single investor per property but not providing a lien / collateral -- I wouldn't be comfortable investing with him.