Question on forming a JV with a friend

9 Replies

Hello BP, I've tried this post on another forum; no response, maybe I was in the wrong forum:  

My dad & I are considering entering a joint venture with a good friend of mine who is an GC.  We would like to flip to earn capital for future buy and holds.  We plan to use an investor agent (screening now) for buying & selling, at least initially.   My questions are: 

1. Should we form an LLC or just do a joint venture since this is our first flip. If LLC, can we do it in another state since CA is so expensive.

2. Should we split the profit 3 ways or should my dad & I get a higher percentage since we are putting up HELOC money (dad 120k, me 80k). Also, I plan on spending 15-25 hours a week on the flip myself (I'm pretty handy).

3. Should we just pay my contractor friend his rate and go 50/50 with my dad? We've all heard the saying," A partnership is the hardest ship to sail",  & I don't want to go down in high seas with my dad & a good buddy. 

Thx for your input BP!  Kicking myself for not finding you earlier.

Hi Jeff, 

My partners and I partner with our GC all the time for deals. My recommendation to you is for you and your dad to set up an LLC for yourselfs; call it Caravalho, LLC and set up a separate LLC for this deal where Cavavalho and Contractor, LLC are partners. This gives you the maximum amount of protection and allows for both partners to easily exit this deal. Also, you will see that every deal is different and conditions often change deal to deal.

As far as the equity split, DO NOT JUST SPLIT THE EQUITY evenly JUST because there are three partners. I'm a professor of Entrepreneurship at a university and one of the first things I teach my students is that partnerships are almost NEVER equal. You and your father need to have a serious chat about the equity split of your LLC. If he is contributing more money, but you're spending more time, then maybe a 50/50 split works.

But I can tell you this, based on what you've described above, if your father is not contributing time, the difference in initial capital is not significant enough for you to feel, over the long run, that a 50/50 split is fair.

As far as the JV, if your contractor is delaying his profit until the end of the deal and it's based on a percentage of the profit, then an equity split in a JV is beneficial to you and your dad. If he isnt, then just use him as a contractor.

One sticking point and it's something my investment group is always fighting, is if you're setting up a JV and the contractor is getting an equity position, then he has to honestly give you his costs so that your can accurately calculate the profits in the deal.

Take a look at your deal. If you need to spread risk because the ARV could put you in a bad spot and there isnt enough profit in the deal to GUARANTEE a good pay day, then an equity split JV with the contractor is a good deal. Otherwise, just pay the contractor as a contractor and dont worry about the JV.

Scott, excellent point about thinking before simply dividing the profits by the number of partners. Looking at the total contribution of each partner results in a much fairer division in the long run.

I have an LLC with my GC partner for some of my flips but I had done a few deals with him first. I would use an independant contractor agreement with your contractor friend and do a few deals before I formed a formal entity with him. That way if he doesnt live up to your expectations, you wont have to kill off the LLC or buy him out.

The worst deal I EVER did was with my best friend from High School.  He was a GC, now retired from that field. Thankfully I was paying him as a contractor, because I actually had to fire him.  So my advice is to try him out on a few flips before you bring him into a entity with you.

I hope that helps

Josh

Medium t shirt logoJosh Caldwell, Pittsburgh REIA | [email protected] | http://pittsburghreia.com

Good advice above. I would try to "date" before getting "married". I would be tempted to do a few flips and use him as the GC before forming a partnership.   

Originally posted by @Dustin Miles :

Good advice above. I would try to "date" before getting "married". I would be tempted to do a few flips and use him as the GC before forming a partnership.   

Dustin in right on. My investment group had worked with our GC for five years before we started executing equity plays with him. In fact he built my house, a garage for another partner, and two other properties as our GC before being a partner. 

Wow, this is some good stuff!  Josh, firing your friend must have been fun!  There seems to be a consensus here that taking baby steps is the way to go.  I also like the discussions on not splitting things so simply, although I would err on my dad getting a better deal than me.  Scott, what do you think a good split between my dad & I is, based on what we're contributing & how much I'll be working, ( and using friend as GC)?  Is there a rule of thumb here?  Or are there too many variables for that?  

Thank you all for the great advice, I can't tell you how much I appreciate it!

Have you all ever Flipped a property out of state/ virtually with a partner?

Will you need all 200K of the funds to do a flip?  If you don't then maybe you could put in less money, but use your work to leverage your way to a 50/50 split of the profits.  I think with family the main goal should be to not lose money, so be prepared to "waste" your time if the deal is a break-even deal.  The trickiest scenario is splitting the losses if you lose money on the flip.  If you are ok with 50/50, that is probably the simplest - but it will be a bigger percentage of your financial contribution.

Delon,  I need to do one locally first.

Jesse, yes I am thinking the do more pay less strategy would be best for me.  Thx.

Thanks you all for the great tips!