My brother is interested in joining me on a real estate deal but I have a couple questions for the community on the best way to go about structuring the deal.
My brother will be funding roughly 40% of the rehab cost while I fund the other 60%. However, the tricky part is his wife is the real estate agent that is representing us on the deal AND I'll be the one doing a majority of the rehab on the home. He's not handy and doesn't live near the project to assist.
My question is, what is the best way to structure the profit disbursement being I have to do the 3 months of labor? There's an extra layer of complexity being his wife is the agent but an even 50/50 split seems crazy with the additional time/effort/money on my end.
Am I being a selfish a**hole or is there a way that makes sense for all involved.
These are some good points and that need to be discussed. First off, it sounds like this is your first deal? If this is, or if you have not been doing this with your brother for a long time the splits, or breakdown should be broken up however you both see it being far.
You'll need to get a LLC together (ask your attorney for more guidance), this will help with liability on flipping the home, and also the LLC filing is the easy part; the hard part will be drafting the Operating Agreement (OA). The OA will be where you line out the potential numbers for you and your brother. My suggestion would be sit down with your bother and his wife. You can do a 50/50 split on the first two deals because he is putting in 40% and she is acting as the agent, or you could do 70%/30% on the deals you are doing the work and putting in 60% of the capital.
All of the details you agree to need to be in the AO, and once you agree to them that is how they will pace out and pay out in each deal. You can structure the partnership however you see fit for yourself and your brother. Just make sure it's lined out in the AO, this is because if things go south on a transaction or the relationship you can fallback on the agreement to line out profits etc.
Some great tips there. This is our first deal. I like the idea of a 60/40 split to compensate for my time and additional capital set forth, while still compensating her for her efforts.
I will speak with an attorney regarding the LLC and drafting the OA. I like having the foundation set on paper to prevent any future issues with disbursement.
My next question would be on Pro's and Con's of an LLC. Is there tax benefits/issues? Issues regarding getting financing?
Thanks again for the response @Peter Mckernan
How good is your relationship with your brother? That is vital in this kind of thing.
My brother and I partnered on flips in 2017 and have done ~12 homes together. We didn't start out with anything more than a verbal agreement.
He is a real estate agent, but we got the deals through his friend who mentored us. Initially we did equal portions of work and capital, and we split profits 50/50. I'm not nearly as handy as my brother, but my wife is.
As time went on we learned (quickly) that doing all the work ourselves really sucks, so we hired more things out and accepted a lower profit (really though, if we'd paid ourselves hourly it would be a higher profit).
Eventually my brother quit his day job and did flips as well as a couple of other businesses full-time (I mentioned he's an RA, he's also a professional photographer, and started an RV rental company).
This allowed him a little more time than my wife and I had, and being more handy he spent more time at the houses working on them.
My wife and I fell into the role of providing capital and hiring/managing subs. There was overlap, but because he was now living on the profits he wasn't able to reinvest as much. We didn't touch the profits but funneled them back into flipping.
He grew tired of working so hard and feeling like he was getting a smaller cut, so we decided with him that he would get a base wage for hours spent working on the homes. Something like $30/hour. Might have been $20, I can't remember.
There have been tense times, and it has strained our relationship. We've also made an absolute killing on some of them and celebrated at $100/plate restaurants (Ruth's Chris Steakhouse ftw).
We did finally create LLCs, but our lawyer sucked and so we didn't really do much with them. We've done 1099s, etc. to make sure we're squared away for taxes. We _do_ have an accountant (CPA).
Right now we're not doing a flip together for the first time in a while. We each did one separately this last fall and those worked out well. We will likely work together on more as we get them. Utah's market is insane though so it's pretty slim pickings for flips that we want to take on.
The bottom line is this. If you have a good, mutually respectful and loving relationship with your brother, it'll work out. There were times when things were stressful. We had to lend them sometimes upwards of $10,000 to help them make ends meet after he quit because he didn't have savings and isn't great with his money. He always paid us back, but if he hadn't we wouldn't have cried ourselves to sleep at night, money comes and money goes. Family is important.
Both parties must realize two things: Business is business, and family is family. Don't let business decisions affect your relationship--sometimes you're going to have to decide to do something that will be taken hard, most often it's conversations that must be had that could be offensive. And if there's a chance that a business decision will ruin your relationship, don't do it. I recommend a lot of prayer as you decide how to proceed with every aspect and ever decision.
Sometimes the outcome won't be perfectly fair. You have to be willing to take hits sometimes. You will lose money sometimes and if you can't forgive and try again, it won't work out.
With the money we made from this arrangement we were able to build a new construction home for $300,000, 2000 sq ft finished (5 bed 3 bath) then use a good chunk of that money to finish the basement as an ADU, making our home a 3500 sq ft 8 bed 5 bath, 2 full kitchens, 2 laundry home. We charge about $1400/month for the rental with no utilities because it's hard to separate who is using what. But that makes our portion of mortgage and utilities roughly $600-800, depending. After we refi we can expect our portion of the mortgage to drop to $0, and just pay utilities, because based on comps our home is already worth close to $500k. (Again, Utah's housing market.)
TL;DR: If you have a good relationship and both are willing to take hits and roll with the punches without getting offended and hating on each other, it can work out and the profits and gains can be incredibly good. But you must both be willing to work on it and through it. The hardest part of a familial business partnership is the family aspect. But it can also make the business work where it might not have.
Updated about 2 months ago
I should say that we brought about the same amount of capital to the arrangement (about $9k each).
@Steven Birch a small amount of banks qualify the LLC to purchase, usually they have to qualify the borrowers. Check in to local banks.
There are pros and cons for LLC on taxes and protection. You should talk with a CPA and Lawyer on the pros and cons for taxes and protection.
@Daniel Pearson The relationship is solid. I'm not concerned with the long term success/failure of the business affecting our relationship. My real concern lies in setting precedent for deals moving forward. I don't want to set the precedent of an unfair split while I'm pouring weeks and weeks of sweat equity into the deals.
@Peter Mckernan I have a call into my tax lady to help walk me through the ins and outs.
Thank you both for the insight.
If I were you I would do a 50/50 split and include an hourly wage in your costs, or price per project, then include those costs in reimbursement from revenue.
It may end up making you the same amount of money, but it looks fair. It could also end up making you more money. But the important part is that it'll set a tone for the business relationship that is fair.
@Daniel Pearson The current draft of the agreement is sent over suggesting a 60/40 split. He said he's going to think it over. If he denies, than the next offer will be an hourly rate/punchlist of projects I'm working on. That'll be the next best thing.
First, it is important that you exclude the agent fees from the partnership and just count that as what it is: a Business Expense regardless of who the agent is.
For the partnership structure, I'd suggest you split the profits (keep it simple):
60% to you
40% to your brother
Overthinking of it or by saying you are doing all the work may come across as being a little interesting (nicer word, lol). So, just assume your brother is your money man and you pay him based on the risk he is taking on you.
What I tell newbie investors starting out is why not do a deal from start to finish to prove the concept?
Remember, most projects take longer than anticipated and cost more. Your goal is to mitigate these risks as much as you can. After that you do this a couple of times, you can start negotiating better terms with your brother or whoever partners with who.
I like what Ola said. My brother and I basically did this throughout. Depending on how a flip went, we'd meet and discuss the next one. As we took on more at a time (we had four flips going at the same time at one point), the adjustments would come a couple houses down the line, but we always did our best to make sure the other party felt treated fairly, even if it meant compromising a little.