Real Estate Agent · Ridgefield, CT · Member since 2013 · 19 posts · 0 votes
So a friend and I are ready to buy some fix and flips together. Where can I find info on how we set this up and what we need to have in place regarding paperwork etc. Do we need to form an LLC together, should we open a joint bank account together etc????
How does this work as a proper partnership so it’s all correct? Any good books out there?
@Alan Chambers, you are talking about starting a business together with a friend. Treat this the same way you would any other type of new business, whether it be a grocery store, auto repair shop or landscaping business. Step one is to put a business plan and operating agreement/memorandum of understanding together. Clearly define who has what role and what financial and day to day responsibility each of you has. Define your goals and put plans in place to achieve them.
Research and define your geographic marketplace, your marketing plan and budget for generating leads, your sources of capital for both operating expenses and funding deals. Do you have a "team" of people that will handle the various specialized aspects of a house flipping business (Realtors, CPA's, attorneys, contractors/tradesmen, title companies, lenders, etc.)? If not, you need to start networking to get some good referrals.
Get advice from an attorney and CPA on how to best structure your business entity based on your individual and collective situations. Lots of people that own and operate house flipping business opt to structure either an S Corp or LLC taxed as an S Corp, but you have considerations like drawing a "reasonable salary", self-employment tax, etc. You need to talk this through because everyone has different life and tax things to consider.
I am sure you have already been advised to not go into business with a friend, so I won't waste time mentioning it. But, my best advice would be to go through a thorough planning process and really put thought into your plan for achieving your goals. Do NOT just treat this like, "Hey, let's go find some houses and flip them together to make some money", because that is not a plan or an actual business and is likely to lead to a damaged relationship with your friend.
@Alan Chambers, you are talking about starting a business together with a friend. Treat this the same way you would any other type of new business, whether it be a grocery store, auto repair shop or landscaping business. Step one is to put a business plan and operating agreement/memorandum of understanding together. Clearly define who has what role and what financial and day to day responsibility each of you has. Define your goals and put plans in place to achieve them.
Research and define your geographic marketplace, your marketing plan and budget for generating leads, your sources of capital for both operating expenses and funding deals. Do you have a "team" of people that will handle the various specialized aspects of a house flipping business (Realtors, CPA's, attorneys, contractors/tradesmen, title companies, lenders, etc.)? If not, you need to start networking to get some good referrals.
Get advice from an attorney and CPA on how to best structure your business entity based on your individual and collective situations. Lots of people that own and operate house flipping business opt to structure either an S Corp or LLC taxed as an S Corp, but you have considerations like drawing a "reasonable salary", self-employment tax, etc. You need to talk this through because everyone has different life and tax things to consider.
I am sure you have already been advised to not go into business with a friend, so I won't waste time mentioning it. But, my best advice would be to go through a thorough planning process and really put thought into your plan for achieving your goals. Do NOT just treat this like, "Hey, let's go find some houses and flip them together to make some money", because that is not a plan or an actual business and is likely to lead to a damaged relationship with your friend.
Once you have a business plan in place have a lawyer advise and draw up a legally binding partnership agreement based on that plan.
If you want to hope to remaine friends better treat this as a proper business partnership agreement. Never rely on friendship and a hand shake. Business does not work that way. Always seperate business from friendship.
I encourage new residential investing partners to buy their first one as TIC with %s listed. Then have a JV agreement for that specific deal. If it works out, look into a perpetual entity like an LLC.
Check with a legal pro. I'm just an old guy that likes to take naps.
Glad this is at least recognized as a partnership. Lots of gf/bf 'partnerships' happening and they're acting like they're married or something with no written agreements. A rude awakening will be upon most when the roommate they sleep with thinks they have community property and are covered. LOL
I went to my bank first, and asked them for references for CPA and an Attorney. Then, my partners and I formed an LLC, and opened up bank accounts in the LLC name. The LLC Operating Agreement spells it all out, including a Buy/Sell Agreement for the shares that we each purchased into the LLC. Do NOT leave anything for granted or on a handshake. Life changes happen. Even if it's all good today, it could change tomorrow. And, no, you don't need an LLC for each and every property, nor do you need separate bank accounts for each and every property.
@Alan Chambers
Absolutely agree you should start with a business plan then get in touch with a CPA who has worked on similar agreements like yours. Form an LLC, and make sure to have open and honest communication with your friend. Good luck!
@Alan Chambers If you form an LLC or other business entity, have a way for either of you to get out of the business should an issue come up (i.e. buying shares out, paying specific amount, etc.). You just never know what will happen in the future...especially with a partner. Talk to a real estate attorney about entity structure and drafting up the agreement, if you need to. Good luck!
While I know next to nothing about investing I do know a little about business. You can have a friend or you can have a partner but you can't have both in one....
@Alan Chambers forget the friend, find a partner that knows more than you do about flipping/real estate. Leverage their experience and knowledge and save your friendship. Real estate will throw some stress on you when you least expect it and even if you can handle it, your friend may not handle it the same as you. Hope this helps!
It's easy to invest with friends if you've established a proper operating agreement. Part of doing this is working with a lawyer to ensure no stone goes unturned. It will cost you upfront, but be well worth the expense. Not to mention, working with a lawyer will familiarize you with many more agreement possibilities than you likely know about right now. It will kind of open your mind to all the ways a company can be structured, and all the fail safes a contract needs.
Ask yourself, what is your friend bringing to the party to compliment what you bring? You might not need them. Sometimes we partner to feel comfortable going out on a limb. Be prepared to have the tough, uncomfortable discussions. Be prepared to lose a friend if it comes to that. Not saying you will, but be prepared. In the words of the immortal Biggy Smalls, "even your moms will set that *ss up properly gassed up, hoodied and masked up, for the fast buck, she'll be laying in the bushes to light that *ss up"
I did this, My wife and I and our good friends of 25 years bought a beach property together as a personal use property, then decided to start our "Rental Empire". it's time for some frank conversations with your friend to see if you two even want to be partners (Or can be). If you have no money and he has it all, or you're an 872 credit score and he's a 514 it can still be done...but would you or he want to? Lay it all out together then go see an attorney to formalize. Our motto is "We won't throw away a 25 year close friendship over the color of the pillow shams."
@Owen Dashner gave great advice higher up in this thread, PLEASE read his last 2 paragraphs several more times!
I'd advise getting an attorney that specifically operates in the real estate world and has rentals of their own. It's been a huge help being able to work with my attorney and he actually "gets" it. Plus if they know their stuff they'll have the real estate specific documents for LLCs, leases, evictions, notices, etc., right on hand.