How to structure the private money deal

4 Replies

So I am looking for my next flip in Houston (wholesalers, let me know if you have anything!)

The reason I am writing this post is that I have two friends who want to lend me some money for the flip (I will put in some money of my own as well). In return, the three of us will share the profits equally between us. I have two questions related to this:

1. I want to set up a contract between us, that states that they are lending me money, and we will share the profit etc etc. Basically the terms of the loan. This is to protect ourselves, from each other, in case something goes wrong.

2. Who will own the house while it is being remodeled? Me alone, or the three of us?

If you have any other advice, please feel free to share them with me!

Thank you in advance!

Hey Naeem, I'm not a CPA or attorney and you should run it by both to see what they suggest, but how I structure my deals:

1.I have an entity set up (S-corp as well as an LLC) and you can draw up promissory notes with them stating they are lending you $XXX on date XXX and you have to pay them back by date XXX with an interest of XXX%. Doing this you can also secure the promissory note with the property/Deed of trust(if you don't pay them back, they can take the property).

You can put in there a no pre-payment penalty as well. So if you owe them that money with interest a year later and you flip the house in 6 months, there is no penalty.

Another way is they can both get their own attorney's and have them write up contracts and give it to your attorney and everyone signs that way.

2. You can also set up an entity with multiple owners 33% each. I have never flipped a property outside of an entity so I don't know the process but I'm sure you can buy it in all 3 of your names as well.

Either way i would ask a CPA / Attorney in your area. Hope this helps!

Ryan

You'll want a combination of a few contracts drafted by an attorney. Firstly, when you lend money to another person for a flip, you want a note secured by a deed. Secondly, if you are partnering in a flip, you'll want a partnership agreement which details the profit (and loss!) sharing and protects everyone. Thirdly, its a very good idea to form a business entity to shield each partner's personal assets, either a corporation or LLC (a CPA can tell you which type you want for tax reasons - they both legally shield your assets). The combo of the partnership and the business entity makes sharing profit easy - all expenses are paid from the business's account, all profit from the sale goes into the business account, and then you can later disperse the profits out of the business account according to your partnership agreement (1/3 or whatever).

Also, assuming you have the entity formed, the business entity buys the property.  That is "who" owns the property while being remodeled.

@Naeem Kapasi , IMO, doing all the work and giving up 2/3 of the profits on a small rehab is not the way to build wealth.  Utilizing leverage by means of debt while keeping equity will allow wealth accumulation at triple the pace.

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