Partnering up with a friend on our first deal

Rental Property Investor · Columbia, SC · Member since 2020 · 15 posts · 1 vote

I'm thinking of doing a deal with a good friend of mine. We both know how to do most of the work, but it would mostly be him since i have another job that takes up a lot of my time. I would be basically funding the rehab since he had already purchased the property a couple months ago on his own before we spoke about partnering up. Property was bought for around 45k ( that he paid out of pocket) and probably needs around 20k-25k for rehab.

I just need advice on how to split the profit or losses if any ?

Do we need to create an LLC or would a contract be good enough ?

What would be the best thing to do in this situation ?

Thanks

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Bridgette Delva

Rental Property Investor · Ocala, FL · Member since 2017 · 138 posts · 100 votes

HI @Oliver Lazaro the most risk adverse step would be to consult with an attorney and draft up a contract with them; this would be the most conservative way, to ensure neither party will lose and all risk is managed. Of course, the least conservative way would be to have no agreement (which I would never recommend). For our first investment partnership, we just used a loan template doc that we found online and personalized it to our terms then signed (with notary). This is a legally binding doc and if it ever came down to it, it would be enforceable in civil court.

As for how you could structure the deal - that's totally up to you two. If you're only looking at it as a loan then you'd want to simply charge interest on your money; something like 10-15% for private money. This method would ensure you get your money back independent of how the deal turns out. You would set a repayment term and repayment amount (lump sum or installments).

If you want to benefit from the profit on the flip, you could simply say you want your loan amount in full plus "x" percentage of the profit. Since he put in 45k and you're possibly up for 25k, rough math would say that you'd be up for ~35% of the profit. This also ensures you get your money back in full but could also benefit from the profit.

Of course you could do a combination of the two (anything in between) where you still charge interest on your loan AND you share in the profits.

The way you craft the financials is totally up to you guys and what you feel comfortable doing.

Hopefully that helps.

**Please note that I am not an attorney and have no training in law so these are just suggestions based on experience.

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Bridgette Delva
Rental Property Investor · Ocala, FL · Member since 2017 · 138 posts · 100 votes
6y
HI @Oliver Lazaro the most risk adverse step would be to consult with an attorney and draft up a contract with them; this would be the most conservative way, to ensure neither party will lose and all risk is managed. Of course, the least conservative way would be to have no agreement (which I would never recommend). For our first investment partnership, we just used a loan template doc that we found online and personalized it to our terms then signed (with notary). This is a legally binding doc and if it ever came down to it, it would be enforceable in civil court.
As for how you could structure the deal - that's totally up to you two. If you're only looking at it as a loan then you'd want to simply charge interest on your money; something like 10-15% for private money. This method would ensure you get your money back independent of how the deal turns out. You would set a repayment term and repayment amount (lump sum or installments).
If you want to benefit from the profit on the flip, you could simply say you want your loan amount in full plus "x" percentage of the profit. Since he put in 45k and you're possibly up for 25k, rough math would say that you'd be up for ~35% of the profit. This also ensures you get your money back in full but could also benefit from the profit.
Of course you could do a combination of the two (anything in between) where you still charge interest on your loan AND you share in the profits.
The way you craft the financials is totally up to you guys and what you feel comfortable doing.
Hopefully that helps.
**Please note that I am not an attorney and have no training in law so these are just suggestions based on experience.
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Oliver Lazaro
OP
Rental Property Investor · Columbia, SC · Member since 2020 · 15 posts · 1 vote
6y
@Bridgette Delva Thanks for the info, it was very helpful ! I guess we'll have to think about how want to structure it. But i like both of your suggestions, i'll just look more into it to see which one is more beneficial.
One more thing, if you don't mind me asking... did you create an LLC for that partnership investment ?
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Bridgette Delva
Rental Property Investor · Ocala, FL · Member since 2017 · 138 posts · 100 votes
6y
@Oliver Lazaro no LLC, not sure what benefit we would have for the one time deal.
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Oliver Lazaro
OP
Rental Property Investor · Columbia, SC · Member since 2020 · 15 posts · 1 vote
6y
@Bridgette Delva ok, got it.
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Oliver Lazaro
OP
Rental Property Investor · Columbia, SC · Member since 2020 · 15 posts · 1 vote
6y
@Bridgette Delva btw, i sent you a colleague request !
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Chris Teti
Realtor · Southern NJ · Member since 2017 · 188 posts · 68 votes
6y
Congrats! The first project is always exciting. I wouldn't create an LLC together until you've done more deails together and decide it's a good fit. It would be a good idea to create an LLC for yourself as 100% owner. It's pretty easy to do and it will start the seasoning period for the entity so as it matures, more lending options open up.

Definitely have an agreement and talk through responsibilities and what happens if you do well or things go sideways. Talking it out upfront and putting it on paper will make sure both of you have the same expectations.

Good luck!
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Daniel HymanBusiness Member
CPA · Milwaukee, WI · Member since 2016 · 2k+ posts · 1k+ votes
6y
@Oliver Lazaro
I would recommend consulting with an attorney about an LLC. Its a critical decision and one that could impact asset protection and tax implications, depending on which way you go.
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Oliver Lazaro
OP
Rental Property Investor · Columbia, SC · Member since 2020 · 15 posts · 1 vote
6y
@Daniel Hyman Ok, thanks ! That is something to think about then. I'll will contact a local attorney to set try and set up a consultation. Anything else i should think about ? It could be that my friend and I could end up partnering up for more investments if everything goes well.
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Daniel HymanBusiness Member
CPA · Milwaukee, WI · Member since 2016 · 2k+ posts · 1k+ votes
6y
Originally posted by @Oliver Lazaro:
@Daniel Hyman Ok, thanks ! That is something to think about then. I'll will contact a local attorney to set try and set up a consultation. Anything else i should think about ? It could be that my friend and I could end up partnering up for more investments if everything goes well.

There are very specific tax compliance requirements for partnerships. Make sure to consult a CPA so you can understand what those are. Our firm is currently helping clients who did not even realize they had to file partnership tax returns. Needless to say, they did not file extensions and will be hearing from the IRS soon. Don't be like them.

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Oliver Lazaro
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Rental Property Investor · Columbia, SC · Member since 2020 · 15 posts · 1 vote
6y
@Daniel Hyman I will take a look into that. Thanks for the heads up !
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Oliver Lazaro
OP
Rental Property Investor · Columbia, SC · Member since 2020 · 15 posts · 1 vote
6y
@Chris Teti Thanks ! and thanks for the input. Yes, we are definitely working things out before we start doing anything on the property. Hopefully everything turns out great.
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