@Abby H. Congrats on knocking down your first deal! Moving on to deal #2 is arguably more exciting than the first! This is the time you can really start to build some momentum in your RE investing endeavors.
It sounds like you have a few big questions that need to be cleared up before you can confidently take down "deal #2". One thing at a time here...
STEP 1 (Understanding your value): First things first,it's SO important that you understand YOUR skillset, or maybe lack thereof in real estate before engaging potential business partners. If you have a pile of cash laying around, you may be wise to partner with an experienced operator to handle the majority of the day-day management. If you’re investing in a fix-n-flip project, this may come in the form of project management: meeting with GCs to bid out the construction, cutting checks to vendors and working with designers, architects, running materials etc.
Assuming you’re not “the money” side of the deal, you should look to provide value in some other capacity. You could in fact, act as the project manager. If you have your RE license, you can market and sell the property at cost. Maybe you’re a contractor or just generally experienced with renovations- all of these skill sets bring value, and if possessed, should be pitched to your potential money partner(s).
Once you and your partners agree to what each party will contribute, you’ll need to make sure to reflect that in writing and have the proper legal entity in place for co-ownership. That's the next step…
STEP 2 (Legal Structure): Generally speaking, the simplest way to go about structuring a partnership is to form an (LLC) Limited Liability Corporation in the state you plan on purchasing the property. You can do this yourself in most states, on their respective (SOS) Secretary of State website. I won't get super detailed, but for tax benefits, its worth looking into making an "S-CORP" election. Talk to your CPA or google for more information on that. Next, you'll want to have an operating agreement and (JV) joint venture agreement drafted. I highly recommend employing an experienced RE attorney to draw up these documents for you. To briefly explain each:
Operating Agreement: This identifies the company, states its ownership (equity ownership %'s and initial investments), defines member duties and lays out other structural features of the business. It usually includes basic information about the LLC and its owners (known as members), the company's elected tax treatment and guidelines for how certain key procedures will be handled. Operating agreements function as a legal contract between or among members of a multi member LLC, though even single-member LLCs can benefit from one, too.
Joint Venture Agreement: In its simplest form, this will outline what is expected from each party throughout the duration of the partnership. This is vital to your success because should your partner fail to perform, you'll have an agreement to hold them accountable. This is especially important when you're partnering up with someone you're new to doing business with. If and when problems arise, you'll be happy to have a clear reference as to what all parties agreed to.
Once you have your LLC, OA and JV agreement you should now be able to take title into your newly formed company, of which all parties/partners are co-owners in.
I have plenty of experience structuring deals similar to this and endured both good and bad experiences. Like so many other things in life, it’s all about choosing the right partner(s) and clearly outlining what is expected from each.
I hope this helps! Let me know if you’re ever interested in investing here in Denver.
