How to partner with a contractor?

Question

Hi all,

I am seeking help in how to structure deals in partnering with a contractor. I am in the medical field, and my father in law is more or less a contractor who now specializes in speciality carpentry work. He's interested in getting into "flipping houses" and has started discussions with me about partnering up. Basically I'm the money, and he's the construction.

My question is, how have other people who have gone down similar routes structured deals?

I have been researching real estate, and am in analysis paralysis currently, but am anxious to make my first move. I'm interested in buy and hold and rent. I would not be opposed to buy, remodel, rent, then sell a few years later. I think the later is what my father in law is interested in.

So, how does this work with two people? Let's say I put the downpayment down, he contributes his time for free in managing his sub contractors, I pay the subcontractors, then when we rent it, lets say monthly cash flow is $400 after everything is paid. If we split 50/50, that's $200 each. That sucks. He did say he would play role as property manager and "Mr Fix It" when anything breaks at the property(ies.) So that has value.

And lets say it comes time to sell in a few years. I would assume that from the sell I would pay myself every penny I put out in cash, then split the profit 50/50?

It just seems like in this type of situation that I'm the one taking on all the risk. If the flip is a bust, I'm the one who lost tens of thousands of dollars. He may have lost 2 weeks of his time, which also has value.

When I first was considering getting in this game, I was only thinking of using a contractor on a "pay for service" type arrangement. But I also realize that having a contractor arrange all of this and oversee things has value, because I know how a contractor will say "Bathroom tile? $2000" and then pay the sub $800 and keep $1200 for himself.

Anyways, I was just hoping to hear from anyone who has been down this road. Also, I am aware of "TV math" for flipping and how it's not remotely as profitable as it seems on TV.

Josue Guerrero · Answer

Account Closed

Roger, one of the greatest pieces of advice I've been given by a mentor is to NEVER go into business with friends or family. From what I'm gathering, your father in law wants to be your general contractor AND your business partner, yet you're the one financing all of the properties and taking on all of the risk.

Taking on a partner in real estate, especially one that's family is going to take on a lot more stress than you would want. Especially when you have to split your profits in half with someone you feel isn't going to be taking on nearly as much risk as you are. Like Jonathan said above me, firing a contractor is easy work, and once it's done, it's done. Firing a father -in-law is going to strain your relationship with him, and in the long run, strain your relationship with your wife.

Still, if you felt like you could trust your father in law to be a reliable contractor that was going to stick to deadlines and give you fair prices, it may be a good idea to look into just hiring him as your go to the contractor, but not much else than that.

Best of luck to you, please keep me updated on your situation, would love to hear more about it.

Josue

Jonathan Godes · Answer

If the reno is only 2 weeks long, it seems like it would be pretty simple and straightforward. If you didn't use your father in law, you would probably pay a GC $2,000 to run the job for you and a property manager to be "Mr. fix it" 10%. I just don't know what he brings to the deal that would justify him getting 50%. If he does all the renovation, all the PM and all the repairs and 2 am clogged drain calls, it MIGHT be worth 20%.

But to be honest, disregard that previous advice. DO NOT GO INTO BUSINESS WITH FAMILY. Especially a father-in-law. You are already feeling a bit wary of the 50/50 split (as you should), so imagine the resentment you will have when the reno takes longer, costs more, and YOU are the one getting the late night calls and dealing with vacancies. You can fire a contractor, you can buy out (or get bought out) by a buy and hold partner. You cannot ease the tension your wife feels because her dear ol daddy is causing you (and her) stress and anxiety.

Disclosure - I am not a psychological expert, please seek preemptive professional marriage counseling.

How to partner with a contractor?

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