Best Structure for a JV arrangement for fix and flip?

Question

We have several investors interested in doing a JV fix and flip with our team.  These would be simple one off projects and so it doesn't seem like the right project to form a complete LLC with operating agreement as we would for a larger project.

With the arrangement, they provide the funds we source, manage, and dispose of the asset.  We can have them sign a JV agreement, but wanted to know if there was another way to help secure their money that you all have used.

We thought about putting them on title directly with us, but didn't know if that affect how we could get financing from a hard money lender or bank.

We could, (I guess??) record a second mortgage in their name with the closing company, but again might affect our ability to get financing.

The other thought would be a profit share promissory note.

Any thoughts//experiences?

**I'm not asking for legal advice, more of what you've done in the past.  We will consult a lawyer before finishing.

Ashish Acharya · Answer

You could give them first lien on the house when you first buy it. HML see that all the time so you should not have trouble finding it.

Entity structure:

You do not want LLC for each deal. Instead see below.

One LLC  taxed as S-corp is not a stretch for what you are doing.    This is recommended if you want to save money.

1) You have your S-crop. ( S-Corp saves you Self Employment taxes).

2) Have your S-corp partner with other people who wants to flip.

Basically your S-corp and another person is creating a partnership. This JV venture will file a 1065 partnership return. The profit will flow to your S-Corp. So you S-corp can do partnership with as many people as it wants. So each partnership with other person is required to file 1065 even if you did not have S-corp in the middle.

The profit that flows to S-Corp via all these partnerships will not be subject to Self Employment tax when it finally flows to you.

Eg: Lets say you get 200k from 4 different partnership after a flips. Your Scorp will report that income in it’s return(1120). S-Corp will pay, lets say 50k, in salary to you. The remaining 150k is not subject to SE taxes. Generally, you are saving 150k * 15.3%  = 23k.

If you don’t have S-corp in the middle  you would pay that 23k in self employment taxes.

You need to discuss the legal side as well.

Jesse Blaine · Answer

Thank you for the response @Ashish Acharya