Multi-party investing deal structure for BRRRR/House hack

Nate McCarthy · 2025-01-13T20:08:35-08:00

My sister-in-law has found a house in their neighborhood that has been vacant for years, and lo and behold, the owner has passed away and the heirs are looking to sell. Lots to be figured out in this deal but let's assume for now that it's priced right for a BRRRR or flip.My wife and I have been looking to move into a house hack in the area, and friend has just sold their house and has cash they're looking to invest in a flip. My wife's sister--the house-finder--is interested in putting some of her money into this deal, too. In general, I'm curious how investments with multiple investors are structured. Are returns just split proportionally according to how much each party invested? What if one party is doing more leg work? These are the scenarios I'm looking at.Let's say the three parties (Me and my wife, friend, and sister-in-law) invest three ways, say 2:1:1, with the friend being the biggest investor. My wife and I move into the house since we are looking to move to the area anyways, and we all do a lot of the rehab ourselves, probably with my wife and I doing a little more since we would be living there.In this case, how does the friend with cash get their money out of this deal in a time-efficient manner, since they're primarily looking at this as a flip? My thought is to BRRRR it and refinance, and they get their cut of the equity (which I assume would be split 2:1:1). However, if we paid for the house mostly in cash, does it make sense to refinance and incur a high monthly mortgage payment? This is a fundamental component of the BRRRR strategy that I have yet to understand.Or, does it not make sense for the friend to invest in this deal if they're primarily looking to flip? I can think of a couple of seemingly great reasons to stay in the deal, which would be 1) they'd get a portion of the rent we'd be paying to live there (again, I assume this would be split 2:1:1), and 2) if we live in the house for a couple of years, couldn't we sell it tax-free, since we would be owner-occupants? Then we'd all split the tax-free profits. Or does this not apply when there are multiple owners, since only 1 of the 3 invested parties is living there?Is there a better way to structure this deal besides proportionally splitting the profit from refinancing (and/or eventually selling) and the rent (which we'd be paying)? Again, I do not know how multi-party investments are typically structured and I'm very much looking to find out!I'm really interested to learn how more experienced investors would approach this. Thank you so much for your insight!

Tim DelaneyPro Member

Buffalo, NY · Member since 2018 · 790 posts · 530 votes

1y

You have a lot going on there and I’m not sure I fully understood your thought process. At a basic level there is no one set way to structure a partnership. There is definitely more too it than just the money that goes in. But with three partners and one looking to move into the property it will probably be complicated. So first, can you do this without the other two partners or with just one of them? Or just pay your sister a finders fee for getting the deal?

If the other two parties want to flip a house maybe they can do just that as partners and then sell you the house which you can buy with a primary home loan with low down payment. They could even hire you to do the work on the house and instead of paying you they could just give you a credit at closing. That may keep things cleaner for everyone.

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Melanie P.Pro Member

Rental Property Investor · Member since 2023 · 1k+ posts · 922 votes

1y

As the person with the money, I would ask you how much rent you intend to pay the partnership each month while occupying the investment property?

Flips must be completed FAST. Moving into a flip is going to slow down the process and thus raise carrying costs. Getting you to finish the work and then to leave are other problems I see in your "deal structure."

Other than living at the work site what is your contribution to this transaction?

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Jake BakerBusiness Member

Flipper/Rehabber · San Diego, CA · Member since 2020 · 1k+ posts · 696 votes

1y

@Nate McCarthy

Profit Splits and Contributions:
Dividing profits proportionally to investment (2:1:1) is common, but you could also account for sweat equity if one party is doing more work. For example, you could create a weighted structure where a percentage of profits is based on cash contributions, and another portion compensates for rehab or management efforts.

Rent Payments and Tax-Free Profits:
If you structure it as an owner-occupied property, the rent you pay could be shared proportionally, but tax-free gains on resale may only apply to your share, as you’d be the owner-occupant. A CPA familiar with real estate partnerships could clarify the implications for everyone involved.

A great attorney or CPA can help you iron out the details and ensure the partnership benefits all parties fairly. Best of luck. This sounds like an incredible learning experience!

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Nate McCarthy

OP

Member since 2024 · 20 posts · 14 votes

1y

Quote from @Tim Delaney:

You have a lot going on there and I’m not sure I fully understood your thought process. At a basic level there is no one set way to structure a partnership. There is definitely more too it than just the money that goes in. But with three partners and one looking to move into the property it will probably be complicated. So first, can you do this without the other two partners or with just one of them? Or just pay your sister a finders fee for getting the deal?

If the other two parties want to flip a house maybe they can do just that as partners and then sell you the house which you can buy with a primary home loan with low down payment. They could even hire you to do the work on the house and instead of paying you they could just give you a credit at closing. That may keep things cleaner for everyone.

Tim, thank you so much for the thoughtful response here. I think all of your suggestions are great possible ideas to do this deal!

To simplify the scenario I'm envisioning let me put it this way: what does a BRRRR look like when one of the parties contributing to the down payment and rehab costs ultimately ends up being the renter as well?

I'm curious about this particular scenario because I'm imagining it as a way where all 3 parties (in this case) can get something out of the deal. That said, I'm grateful for the alternatives you present--you're keeping the bottom line in mind, so I appreciate your help in exploring options that achieve the bottom line for the investors.

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Nate McCarthy

OP

Member since 2024 · 20 posts · 14 votes

1y

Quote from @Melanie P.:

As the person with the money, I would ask you how much rent you intend to pay the partnership each month while occupying the investment property?

Flips must be completed FAST. Moving into a flip is going to slow down the process and thus raise carrying costs. Getting you to finish the work and then to leave are other problems I see in your "deal structure."

Other than living at the work site what is your contribution to this transaction?

Melanie--great question! I was hoping someone might have some ideas on how much I'd pay while occupying the investment property. My idea is: exactly as much as would make this a worthwhile investment for the parties beside myself. In other words, I'd hope to pay market price to rent the place out so the home buyers can get an optimal but realistic return on their investment.

So my goal to make this appealing to me, as a potential renter, is to also be one of the buyers. So if the deal goes right, I get a return in the form of equity on the house, and my rent is also reduced since let's say, as part owner, I would be receiving a portion of the rent (which I would be paying...). But this is where I start to wonder if this deal really works well for everyone!

I completely agree that flips must be completed fast to keep the cash mobile so it can generate yet more cash. This is exactly why I'm asking the question, because it may be the case that some of these investors would be better off either purely treating this as a flip or just moving on from this deal if they can't flip it and get their cash back within a few months.

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Nate McCarthy

OP

Member since 2024 · 20 posts · 14 votes

1y

Quote from @Jake Baker:

@Nate McCarthy

Profit Splits and Contributions:
Dividing profits proportionally to investment (2:1:1) is common, but you could also account for sweat equity if one party is doing more work. For example, you could create a weighted structure where a percentage of profits is based on cash contributions, and another portion compensates for rehab or management efforts.

Rent Payments and Tax-Free Profits:
If you structure it as an owner-occupied property, the rent you pay could be shared proportionally, but tax-free gains on resale may only apply to your share, as you’d be the owner-occupant. A CPA familiar with real estate partnerships could clarify the implications for everyone involved.

A great attorney or CPA can help you iron out the details and ensure the partnership benefits all parties fairly. Best of luck. This sounds like an incredible learning experience!

Jake, thank you so much for your input! Two important takeaways for me:

One, it sounds like a "weighted structure" deal is in fact a possibility. I had thought as much but it's encouraging to hear from an experienced investor.

Two, it sounds like talking with a CPA is an absolute must on the tax implications of this deal!

And of course it goes without saying that any deal of this kind would involve an experienced real estate attorney--especially one that is "great" 😉

Thank you for the insight, which is both practical and encouraging! As I'd imagined, it seems like there are no hard-and-fast ways that a deal must be structured, but rather there is room for flexibility depending on the situation, and in any case consultation with experienced professionals at every level is key.

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Melanie P.Pro Member

Rental Property Investor · Member since 2023 · 1k+ posts · 922 votes

1y

@Nate McCarthy What makes it worth a renter's money to pay rent is possession of the premises. That is it. From day one.

You're free to call it "weighted deal" and there is no law against a bad deal - anything you can talk another person into is technically "possible." Don't expect these people to have anything to do with you once the transaction is over and a lot of bitter, nasty fights along the way.

You didn't find the property, you're not doing the rehab work, in fact are going to delay and interfere with the rehab by moving in while it's still under way. If you need a house to rent to live in - go to Zillow. If you want to have ongoing relationships with people you have to create some value in the transaction. I do not see that here. I see you trying to pull one over on a couple of people... In my opinion this will not lead to long term success - if that is of any interest to you focus on saving up enough to purchase your primary residence. Once that is squared away you'll have more experience to explore investment property.

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Tim DelaneyPro Member

Buffalo, NY · Member since 2018 · 790 posts · 530 votes

1y

Quote from @Nate McCarthy:

Quote from @Tim Delaney:

You have a lot going on there and I’m not sure I fully understood your thought process. At a basic level there is no one set way to structure a partnership. There is definitely more too it than just the money that goes in. But with three partners and one looking to move into the property it will probably be complicated. So first, can you do this without the other two partners or with just one of them? Or just pay your sister a finders fee for getting the deal?

If the other two parties want to flip a house maybe they can do just that as partners and then sell you the house which you can buy with a primary home loan with low down payment. They could even hire you to do the work on the house and instead of paying you they could just give you a credit at closing. That may keep things cleaner for everyone.

Tim, thank you so much for the thoughtful response here. I think all of your suggestions are great possible ideas to do this deal!

To simplify the scenario I'm envisioning let me put it this way: what does a BRRRR look like when one of the parties contributing to the down payment and rehab costs ultimately ends up being the renter as well?

I'm curious about this particular scenario because I'm imagining it as a way where all 3 parties (in this case) can get something out of the deal. That said, I'm grateful for the alternatives you present--you're keeping the bottom line in mind, so I appreciate your help in exploring options that achieve the bottom line for the investors.

I think if you are going to keep all three parties involved as owners of the deal long term then you need to separate yourself as a renter and a contractor. If you are going to be doing the rehab work in exchange for equity then that value needs to be determined up front with a specific timeline that you have to adhere to in order to earn your equity. This is a significant risk to the other two parties that are bringing the deal and the money when they could just as easily hire a contractor and keep the equity for themselves. As for rent, the three parties agree on a fair rent for the apartment and that is what you pay the partnership every month in rent. You take your share of distributions if/when there is money to share.

And then I go back to the person with money. If they want their money back fast like a flip then let them flip it and you buy it as a primary residence with a conventional or fha mortgage. You will get way better loan terms than you would on a Cash out Refi as a partnership entity with no RE experience.

This is all very theoretical, can you share the actual numbers so we can help you more?

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Marcus Auerbach

Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes

1y

@Nate McCarthy the odds of disputes arising are considerable. I have seen too many partnerships go bad (almost all, just a matter when), that's why in 15 years I have never partnered.

Simplify the structure as much as possible, have clear roles and responsibilities that are not overlapping (meaning only one person is allowed to make certain decisions) and a clearly defined exit plan.

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Nate McCarthy

OP

Member since 2024 · 20 posts · 14 votes

1y

Well it sounds like this would-be deal is uniformly looked at with suspicion and concern from those of you responding. I appreciate the feedback!

@Tim Delaney I agree that involving myself as a renter/contractor would indeed complicate things. And yes, after reading all your feedback I can see that, as I suspected, a fast flip is probably the best use of the big investor's money. Good to know too that loan terms would be more favorable with a conventional or FHA loan than a refi. That's something about which I have a lot more to learn. Unfortunately, this is all theoretical--the seller hasn't suggested a price yet 🤷‍♂️

@Marcus Auerbach yeah disputes between partners is definitely something I'm concerned about so I appreciate the input. "Simplify the structure as much as possible, have clear roles and responsibilities that are not overlapping and a clearly defined exit plan"... all great advice, and none of those things are certain in this theoretical partnership 😂

@Melanie P. No attempts to "pull one over" on anyone here--in fact this deal and partnership idea were brought to me by the other would-be investors (including the deal finder), because they're interested in making it possible for my wife and I to move closer to them (currently living in different states). So, I floated the idea here on BiggerPockets to see what more experienced folks would have to say about it. And you have spoken! I appreciate the feedback and valuable words of caution.

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Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

1y

@Nate McCarthy

have you done a flip or BRRRR before, or would this be your very first?

to simplify, here's what i would do: don't borrow private money, or partner, until you have a track record. you might be a great guy who's going to keep your lenders whole even if you get upside down. but it's not fair to take what i would consider private money until you have a track record. and that's just lending - partnerships and equity are even more complicated.

now if this would be your 50th deal you can correct me but that's my take. if you buy it yourself and turn it into a live in flip and absolutely crush it, great! pay them some kind of finders fee and then do 4 more and then let everyone know about your track record.

hope this helps. we're trying to protect you and your family - hence the 'suspicion' =)

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Nate McCarthy

OP

Member since 2024 · 20 posts · 14 votes

1y

Quote from @Nicholas L.:

@Nate McCarthy

have you done a flip or BRRRR before, or would this be your very first?

to simplify, here's what i would do: don't borrow private money, or partner, until you have a track record. you might be a great guy who's going to keep your lenders whole even if you get upside down. but it's not fair to take what i would consider private money until you have a track record. and that's just lending - partnerships and equity are even more complicated.

now if this would be your 50th deal you can correct me but that's my take. if you buy it yourself and turn it into a live in flip and absolutely crush it, great! pay them some kind of finders fee and then do 4 more and then let everyone know about your track record.

hope this helps. we're trying to protect you and your family - hence the 'suspicion' =)

Hi Nicholas! This would be my first foray into real estate investing... and I absolutely 100% agree that the best move is to establish a track record using my own money and conventional loans before considering using private money. You and the other posters here have been generous in indulging me in this exercise of considering this "partnership" / BRRRR, but demonstrating that we can invest successfully on our own power before seeking out partners is not only my strong preference but just sound business logic.

As a new investor my head starts to spin when I start to think about investing, and the many gaps in my knowledge reveal themselves: how to structure a partnership? How to take advantage of tax benefits? How to know if a BRRRR makes sense in any given deal when considering refi terms? And on and on. This is what spurred me to ask the initial question and I'm truly grateful for the responses it's gotten. Maybe in the future I'll just start any post with the headline "NEWBIE INVESTOR QUESTION" and I'll get sympathetic pats on the back instead of bewilderment at my zany ideas that are unbecoming of someone experienced 😂

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Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

1y

@Nate McCarthy

it's all good! kudos to you for being so responsive to constructive feedback.

i'm happy to answer any questions you have. i've done a few BRRRRs. the key thing for a BRRRR is: can you increase the ARV significantly enough with the rehab?

to be clear - lots of other issues, lots of other challenges, and BRRRR is difficult right now with interest rates so high. but that's the essential to a BRRRR.

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Andrew Truman Kim

Rental Property Investor · Sacramento · Member since 2024 · 17 posts · 8 votes

1y

I agree with Nicholas. If I put myself in the shoes of the outside partner/investor friend, I would be very concerned because: 1) unclear and/or potentially conflicting business plan, 2) even with clarity in the BRRRR business plan, unclear in the viability of pulling it off with these market conditions, 3) the chances of dispute seems very high, especially if you're going to live in. 4 years ago, I went through a similar thought process when purchasing an investing property with mainly my family money, while considering an outside investor to rehab for higher STR ROI... Even when it wasn't anyone's primary residence there were still many potential dispute trigger points. So ultimately we decided to suck it up and not take on the additional equity, which ultimately required us to take more time on completing the needed rehab, however in hindsight it was a good decision, because even just among our own family there's been lots of dispute on what we want for the business plan and personal STR useage.... Also I agree with another post before regarding the complexity of structuring a deal like this, which would also turn me off especially if I was just getting started. Lot's of great comments here.

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Multi-party investing deal structure for BRRRR/House hack

Multi-party investing deal structure for BRRRR/House hack

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