All Forum Posts by: Lucas Pfaff

@Jered Sturm

Thanks for the insight. There are currently 5 units in the LLC with an additional 5 coming online mid 2016. Although I left it out of the explanation, I will be managing 100% of the construction that we will be starting first quarter 2016. One of the units is a warehouse we will be converting to 6 units. At that point in time we will potentially need to re-evaluate.

@Pat Martin

Thanks for the info. I figured this was a common scenario but haven't been able to find much discussion regarding the topic. Oftentimes it's all about expanding your vocabulary and understanding the language of the industry in order to track down what you're looking for!

I'm a bit stuck in trying to determine the best way for an investor to get compensated for their efforts in an LLC.

I am part of a 2 member LLC in Philadelphia, PA. Originally, both members were operating under an understanding that responsibilities would be split 50/50 but at this point in time, and for the foreseeable future, I have taken on 100% of the operational responsibilities.

Both members have agreed that I need to be compensated for time and efforts but we are stuck with the best method tax wise and operationally to do so.

Here's the (3) options we currently have...

1) Monthly withdrawals directly from the business account

2) Monthly checks - I believe this would result in me being treated as a 1099 employee.

3) Have a portion of my monthly expenses/bills paid by the LLC. This would include qualifying expenses such as cell phone, office rent, car insurance, and internet.

Aside from the actual method of payment, there is also the discussion of amount. Obviously, any payment I receive would reduce the net profit and therefore market value of the property. The effect on market value isn't a major concern at this point in time. We fully expect to hold all the properties under this LLC for at least 5-7 years.

SO....I'm trying to determine two things...the first is the best method for paying me. This seems to be more of a tax issue than anything. The second issue is determining a fair wage. Our initial thought is to compensate me roughly on the level of of a property manager, i.e. a flat rate of ~12% gross rents.

Any and all thoughts/advice are welcome!

BTW - If this question should be placed in another category please let me know. I'm not certain this is the most appropriate category.

Count me in

@J Scott Very true. 

I'm beginning to think that the best option may be for the two to create an entity for the capital partner to lend her capital to at a set rate. This way she gets a return on her funds while the entity would have capital to fix/flip and the two individuals could share equally in the proceeds/upside of their acquisitions. Additionally, as you've said, there's no reason the individuals shouldn't be paid for the work they are doing, be it RE purchase/sales or GC'ing.

@Andrew Cordle I appreciate the input. I will send you a PM now.

Also to clarify, as I mentioned above, these two individuals live together. While not married they have been together 10+ years but are unmarried and do not co-mingle funds.

@J Scott Thanks for the incredibly quick reply! I completely understand what you're saying and it makes sense. To add a bit of depth to the scenario...

The two individuals have invested together before. They currently live in a property that was acquired and rehabbed exactly as you outlined. They have also invested in a small MFH where she has a 75% equity stake and he has a 25% stake based on the capital contributed (minimal rehab). They also both have multiple other investment properties of their own. 

There is a desire between both parties to be equal partners, but they are unsure how to structure it fairly so they both DESERVE to be equal equity partners. 

I'm trying to source any articles, blog posts, etc that discuss the standard options for the formation of partnerships. While I'm generally familiar with the options, I am trying to share this information with friends of mine (a couple although they could just as easily be friends as it shouldn't effect the agreement) who are a bit hesitant. Basically, they are looking to structure a partnership between the two of them to fix and flip properties but are unclear what is generally considered "fair". 

One individual is a GC without capital. The other is a RE agent with capital. There roles would be roughly the following:

Individual #1 (the Agent) - Identifies target properties, closes on chosen property, funds the acquisition, funds the rehab, sells the property.

Individual #2 (the GC) - Analyzes target properties, estimates rehab costs/time-frames, GC's the rehab.

Neither individual would not be paid for their respective services, i.e. GC's labor would not charge for his time and the agent would not charge her commission. The GC would need to charge for the time of his employees.

I see no reason this shouldn't be a 50/50 profit split. Does the community agree? If not, I'd love to hear why and what would be more fair. 

Either way, as I mentioned at the top, I'm looking to find several resources to direct them toward so they can be comfortable with the agreement. Forum posts are insufficient...they would like to see articles/blog posts/documents.

@Nancy L. Thanks for the feedback. My apologies for not responding sooner. I am still considering purchasing in the neighborhood but need to sit down and work out hard numbers before approaching an owner about seller financing/land contract. 

If you're open to it I'd love to buy you coffee/lunch and learn a bit more about Germantown and what you're doing. I've been reading some of your posts and picking up what you're putting down!

@Fred Heller has written a great explanation. 

In addition to what he has said, in Philadelphia specifically, there is a Homestead exemption that can be applied for by resident owners. The basic effect of the exemption is to lower the tax basis of your assessed property value by $30,000.

Per the OPA website....

"The Philadelphia Homestead exemption offers real estate tax savings to homeowners by reducing the taxable portion of their property assessment by $30,000. Homeowners should still apply as close to the September 13th deadline as possible, so that the savings can be reflected in their 2015 real estate tax bill"