The situation at hand

7 Replies

Here's the situation and I need advice to bring to the table within the next few days. Myself, my brother and my father in-law have decided to form an LLC and flip houses. why? I have a full time job but a lot of free time, adn can manage the company and every project . My father in law is a contractor will all the resources and can do work at cost and my brother has 500k to invest. Initially I was intimated, not feeling I was contributing much, but quickly realizing this would never materialize without my time and work. Fast forward we're closing on a house. Since we have the cash, the closing process is much more straight forward and we avoid a lot of bs. Quick fast and convenient. Here's my issue I'm facing. My brother last minute, is having a change of heart in dumping 300 k into the business and instead, is looking into having our LLC, of which we are all equal partners, take a loan out or mortgage from his personal account, to then repay. What are the complications, legal ramifications, additional expenses, pros cons, of instead of dumping money straight in, having a partner make the LLC take out the loan. He is claiming he wants to create a barrier between his investment, but we have several types of insurances for this. Not to mention, if he is essentially going to become the bank, why not simply take out a loan from a bank, and pay them back, sure at a higher rate but NOT having to split the profits... Please advise, I apologize for my lack of knowledge this is new to me.

I want to protect my brothers money, but is this process a time consuming additional expense that will only cause complication ps come tax season?  

Honestly everyone will have different opinions, many including myself say "welcome" to mixing business with family :)

That being said, I would shop around "quickly". If you can find a "bank" that is willing to do the same thing your brother is trying to do than I might say "thank you for your interest" but  either we do it the original way or we have no need for you!

That being said, family ties are always more complication. So are you willing to "strong" arm you brother back? If it was a business associate I would put my foot down if I wasn't comfortable. Remember us humans like to "push and push and push" till we get a push back. So if you want to do this you could tell him your only going to pay an interest rate and that is his "payment". On the other hand, dealing with friends and personal relationship always makes things more complicated than just leaving it as business. 

Thank you for the advice.  He isn't looking to profit from the interest rate, but how can he even funnel that money back in?  It just gets hairy and it seemed easier prior.  

Originally posted by @Miguel Sinclair :

Here's the situation and I need advice to bring to the table within the next few days. Myself, my brother and my father in-law have decided to form an LLC and flip houses. why? I have a full time job but a lot of free time, adn can manage the company and every project . My father in law is a contractor will all the resources and can do work at cost and my brother has 500k to invest. Initially I was intimated, not feeling I was contributing much, but quickly realizing this would never materialize without my time and work. Fast forward we're closing on a house. Since we have the cash, the closing process is much more straight forward and we avoid a lot of bs. Quick fast and convenient. Here's my issue I'm facing. My brother last minute, is having a change of heart in dumping 300 k into the business and instead, is looking into having our LLC, of which we are all equal partners, take a loan out or mortgage from his personal account, to then repay. What are the complications, legal ramifications, additional expenses, pros cons, of instead of dumping money straight in, having a partner make the LLC take out the loan. He is claiming he wants to create a barrier between his investment, but we have several types of insurances for this. Not to mention, if he is essentially going to become the bank, why not simply take out a loan from a bank, and pay them back, sure at a higher rate but NOT having to split the profits... Please advise, I apologize for my lack of knowledge this is new to me.

 So, you're wondering why your brother, that's basically a hard money lender, is having reservations about working with two partners that have zero skin in the game? And yet you're all equal partners? Wow. Your brother got the raw end of that setup. 

It always amuses me how my family and friends come up with ways to spend the money I've saved. You seem to have convinced your brother once, his reluctance is understandable given the setup you described, but the numbers don't lie. 

Convincingly detail how you have the numbers and everything else for that matter in order, and I hope that you do have everything in order. If not, you may have found the reason for your brother's reluctance. 

@Miguel Sinclair  let your brother be the Private Lender on the deal as his contribution with a fixed interest rate or a smaller share of the profits. Secure his loan with a first mortgage. You Jv with the father n law to do the flip. You make profit, he makes secured interest. Latter on he will want in on the jvs. 

Don Harris, Jamison Realty Keller Williams | [email protected] | 704‑962‑0979 | NC Agent # 289021

@Miguel Sinclair There's a rule in business- "He who has the money sets the rules" As long as those rules are legal. So your brother has the money & has set the rules for access to his money. Since this is your first deal- Go along w/ your bother. Create an agreement for a loan from your brother to the LLC, secured by the property. Then execute your plan to renovate & flip the property w/ no hiccups, pay your brother back & split profits.

After the 1st or 2nd success you can then recommend to your brother that the more efficient plan would be for the LLC to borrow the money from someone else or the bank & use his money to make down payments, fill the gap... How many more deals could you do w/ this kind of plan. Right now you're doing one deal w/ the $300K, when you could be doing multiple deals.

But- Get the 1st deal done.  Then maybe get a 2nd deal done.  With those successes under your belt then take a crack at convincing your brother of a plan to leverage other peoples money & manage more than project simultaneously.  

Sounds to me like your brother has the right approach. In your plan, he puts in $300K into the LLC capital structure in which he is only 1/3 partner. So he effectively just gave up $200K. Now at the end of the deal he is supposed to get it back plus share of profits right? But how can he guarantee that when he has only 1/3 share of the LLC? In his way, he is the lender to the LLC and gets paid back his principal that way and then gets a 1/3 share of profits as a distribution from the LLC. Thats a lot cleaner. You could even do a 0% loan if he is agreeable to that but the structure is cleaner the way he proposes it.

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