Beginner Questions Regarding a BRRRR Partnership

2 Replies

I'm new to Real Estate, and am currently in the process of working out the details of a partnership with someone. In a nutshell, we're looking to do one BRRRR together, where I provide most of the capital, and she provides all of the labor (managing rehab, inspections, tenants, etc.). We've worked out many of the high level terms, including how to split costs, profits, and equity, and we've worked through how we'd approach many hypothetical scenarios (eg what happens if we cant recoup X amount of capital, etc.).

We recently got stuck on a few points and I'd love to hear any insight. 

1) Do We Need a Legal Partnership EntityIs it possible to form this partnership just as two individuals rather than through an LLC or other legal entity? We have an agreed upon plan that I mentioned above: I pay for the house, put both of our names on the title, and she manages the rehab and gets it rented out. We've also agreed on how to split costs, profit, and equity. Could we just meet with an attorney who draws up a contract outlining this agreement and sign it? Simple as that? Is this commonly done? Or is there always some form of legal partnership (LLC, Joint Venture, etc). I don't know much about the different types of legal partnerships, but I'm a fan of just signing a contract outlining an agreement for simplicity sake.

2) Difficulty Obtaining Private Lending: Is the private financing trickier in any way because of a partnership? I have capital, but I will need ~50% more for our plans. If I reach out to a hard money lender or a private lender, would it be any more difficult because there are two people working on the project? I imagine private lending is more about building a relationship and hard money lending is more about the property itself.

3) Complications With Cash Out Refinance: Is it possible that I buy the property entirely with my own funds (plus some private lending), put both of our names on the title, and then have the cash-out refinance be entirely in my partner's name? Or does the cash out refinance need to be in both of our names? Or do we need to be looking at a partnership vehicle (eg LLC, Joint Venture, etc.)

@Seth Hochberg

If you have other than a business relationship with this woman, then the best thing is to not do business together. Take an old man's advice: keep personal and business separated.

If your relationship is strictly business, then you're still approaching it wrong, in my opinion. She has nothing to risk other than not getting paid. You have everything at risk. You should buy this property under your name only (or that of your personal LLC if your attorney recommends this as an extra precaution), not put her on the title at any point, and hire her as a contractor which she is in this setup.

If you insist on your pitfall-ridden plan, and you're only planning one deal together, then you probably do not need personal LLCs. Your attorney can set it up as a JV, which for tax purposes will be a partnership. Or, since it's planned as a long-term rental, a 2-member LLC is likely a better fit. And prepare for complications and risks and problems down the road. I had this conversation with dozens of investors over the years, and I'm tired of repeating "I told you so" afterwards.

@Seth Hochberg

To add on...

I don’t see how it’s a partnership. She has nothing at risk and is basically doing a job for which she literally has nothing to lose.

But it’s your plan...

It’s generally advisable to get it all in black and white, which where the attorney comes into play. At this point you’ve formed some sort of partnership...

Since you are doing business with a non-spousal partner, you need some entity to actually divy up your profit/losses. This is the tax/accounting side. If you two take Title personally (again makes no sense as she has put up no capital), you basically have to split everything 50/50.

You really should take Title in the legal entity. Then you need to obtain commercial financing (in my layman's opinion, don't give a mortgage in your personal name since that just screws with your corporate veil). Your other comments/questions shows you need some help in understanding some basics of real estate financing. In short, you need to think about it in terms of the liens and their positions.

That’s the real short of it. Consult some qualified professionals please.