How Do You Structure Rehab Deals With A Few Partners?
I'm a real estate agent. One friend has been doing rehab work for someone else, and another friend is looking for a place to put money.
We're exploring ways to structure potential rehabs with a few participants. I'm looking for a list of things that we need to think about. We're putting a list together on our own, but I'm interested in seeing what the group has to say as well.
I would make it a partnership not unlike an LLC. Essentially everyone owns a set share of the company and will be liable or recieve profit of that share, either through sweat equity or cash. With 2 people I do a 50/50 net profit split, pure and simple. With three it really depends on each person and how much profit is involved. If this is going to be a long term partnership, you may want to go ahead and get an LLC in a tax free state, like Nevada.
Good Luck,
Kyle
LLCs are good for this because the guy doing the work and the guy putting in the money are likely situated differently tax-wise, and because they are in different practical positions. So your LLC operating agreement could do something like this:
Loss% Profit% Liquid%
Sweaty Partner 20% 70% 50%
Money Partner 80% 30% 50%
Say the money partner puts in 75% of the money, but no time.
This structure gives him, a high earner, more of the losses in the early going. He can use those losses to offset other gains. The sweaty partner is allocated 70% of the later profits. But on liquidation of the LLC, they split the return of capital equally.
The splits don't need to look exactly like this, only add up to 100% in each category and follow the "substantial economic effect" rules.
The S Corporation is straitjacketed ... loss % = profit % = liquidation %
I would consider a joint venture agreement. Do one deal at a time and see how they go.
There is no benefit to setting up a corporation in Nevada, unless you are doing business in that state. Your state will still require you to register in your own state as a corporate entity and you will still pay taxes.
I'd be very careful of partnerships and joint ventures. I've got a couple JV houses going right now that I wish I'd never gotten involved with. I kept my end of the agreement but the other guys got into financial troubles and couldn't. Now one house has been foreclosed on and another is in default. I've got about $25k in rehab money tied up in these dogs. My "partners" were experienced real estate agents and a contractor that had been doing rehabs for years. I though there would be no problem.
Buy the place in your own name (or better yet your LLC's name) and run the show yourself. If you need help, use the partners as lenders only, for purchase and fix up money. Keep control yourself.
You are the man with the "deal"
You hold the cards...
Your rehab buddy is your exclusive rehab contractor and gets all the work at a fair price....(his guaranteed earnings)
Your money man get a fixed rate of return on his money secured by the property in question (hes secured and guaranteed)
You are finding, structuring and doing the deal... you are the man holding all the cards...
example:
rehab : ARV 100k
buy at 65k
rehab cost 10k
money man puts up the money (75k) you pay him 12% on the money till the house sells...lets say a year...= 9k he is secured by the deed (hes the bank)
rehab man does the work and collects his profit immediately total 10k
you acquire oversee and sell property for 100k...
100k less rehab -10k=90k
less buy price 65k less interest of 9k=
16k to you....everyone did there part...
everybo[ Edited by DaveREI on Date 10/17/2003 ]