Real Estate Agent · Houston, TX · Member since 2017 · 9 posts · 0 votes
I am a Realtor in Texas and I have a client who is interested in flipping properties but wants me to buy, flip and sell properties and give him a return. The client has agreed to make down payments on all the projects with his IRA money and the balance will be leveraged using a mortgage that I will be borrowing as an LLC. Few questions I have are:
1. Do I need a side contract with the client? Terms?
2. What share of profits should I keep so that I can pay taxes on the income made?
3. Do I need a separate LLC to invest/work with IRA investors?
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
9y
Sounds like a mess waiting to happen the way it's (kind of) outlined.
I have private lenders. The rental rate of their money is in the form of interest. Interest earned by an IRA as a purpose is excellent. I will only lend from my IRA to keep things clean and avoid the high taxes inherent in the earned interest world.
I may do something like this: Using them as a lender only, not equity partner, I would pay a minimum amount of interest as a % borrowed, but additional interest if a certain profit is obtained. Either way, it's still all interest. A bonus of sorts, but paid as interest.
You can't kind of lend and kind of be an equity partner all at the same time, especially inside an IRA. A mess. As a lender, they will have a lien or trust deed on the property but not an ownership interest. Seems to solve the problem about not signing things. Otherwise, I'd pass. If it's just the money you need, save it up or get it elsewhere @Nikita Khambe. This client may not be worth the headaches at all.
Investor · hampton, VA · Member since 2009 · 428 posts · 249 votes
9y
Ok, great idea. Will you be the borrower and his IRA lending you the DP? Or is his IRA an owner and hiring you to do the work. This deal sounds like it could get really tricky, OR kept simple if you're just the borrower on all the debt!?!
One option would be to have the IRA process a promissory note which would be secured by the property. The IRA would be listed as the lender/beneficiary. The note can be structured as interest only with a final balloon payment, for example.
I use IRA money on most of my projects. Is your investor a debt investor or equity. Straight percentage back on there money or part of the profits when the property is sold. Yes you need an agreement i.e., JV, partnership etc. Debt investors in my area 12% annually.
Fix and flips should be done in an S-Corp to save on taxes. The LLC profits will go against your personal taxes. You can have a separate LLC for the investors but it is not required.
Hire an attorney to go over the legal structure for both parties. Consult with a CPA on the tax concerns.
See Mark Kohler on YouTube for free info. He is an attorney and CPA from California. He works all over the country, a great resource. Has a podcast as well every week, mostly deals with real estate investors (legal and taxes).
Ok, great idea. Will you be the borrower and his IRA lending you the DP? Or is his IRA an owner and hiring you to do the work. This deal sounds like it could get really tricky, OR kept simple if you're just the borrower on all the debt!?!
I will be the borrower and he will use his IRA money to make down payment.
based on what you describe it seems that this will be setup as JV, you are the one doing the work, he will be passive partner providing the funds. You will need help of an attorney to help you structure the partnership agreement.
Since the other partner is an IRA investing in an active business (flip), his IRA may be liable for Unrelated Business Income Tax and he needs to consult with a CPA to understand the implications of that.
I use IRA money on most of my projects. Is your investor a debt investor or equity. Straight percentage back on there money or part of the profits when the property is sold. Yes you need an agreement i.e., JV, partnership etc. Debt investors in my area 12% annually.
Fix and flips should be done in an S-Corp to save on taxes. The LLC profits will go against your personal taxes. You can have a separate LLC for the investors but it is not required.
Hire an attorney to go over the legal structure for both parties. Consult with a CPA on the tax concerns.
See Mark Kohler on YouTube for free info. He is an attorney and CPA from California. He works all over the country, a great resource. Has a podcast as well every week, mostly deals with real estate investors (legal and taxes).
Good Luck.
Thank you Kenneth. The client wants his invested money to be repaid plus profits, doesn't wish to earn any interest on his invested money but he also doesn't want his name on the contract.
Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
9y
Here are a couple of scenarios. He is not funding the entire project so I probably would offer 25- 30%. His name is not part of the contract anyway. Its your contract. The investment from him is his IRA not him individually anyway. Not sure what you mean by his name on the contract. I would put offer in company name not your personal name. I have done flips where it is a 50% share in profits. There money (passive investor) and I handle the rest.
Here are a couple of scenarios. He is not funding the entire project so I probably would offer 25- 30%. His name is not part of the contract anyway. Its your contract. The investment from him is his IRA not him individually anyway. Not sure what you mean by his name on the contract. I would put offer in company name not your personal name. I have done flips where it is a 50% share in profits. There money (passive investor) and I handle the rest.
He won't be signing any purchase contracts. My LLC will buy, flip and sell the property. My concern is that the client wants more than 50% of the profits.
Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
9y
More than 50% is excessive since you are doing all of the work and he is not funding the entire project. If he funded 100% then I would be ok with it. If the numbers work and you are ok with the arrangement then go ahead. It seems very one sided and it's not your side.
Investor · Chattanooga, TN · Member since 2016 · 146 posts · 108 votes
9y
What kind of experience do you have doing flips? If you are a semi experienced flipper and you are just looking for way to get more down payment money then more than 50% of the profit is very expensive way to get that money. You would be much better of paying a hard money lender. If you are new and just getting into flipping and you see this as a way to get experience and make some money than it might be worth doing some deals even if most of the profits go to him. But please consult the experts on how to set up the JV. After you have gotten experience and if the flips work out then you can start investing on your own.
However, If you have no experience then why does your client want to partner with you?
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
9y
Sounds like a mess waiting to happen the way it's (kind of) outlined.
I have private lenders. The rental rate of their money is in the form of interest. Interest earned by an IRA as a purpose is excellent. I will only lend from my IRA to keep things clean and avoid the high taxes inherent in the earned interest world.
I may do something like this: Using them as a lender only, not equity partner, I would pay a minimum amount of interest as a % borrowed, but additional interest if a certain profit is obtained. Either way, it's still all interest. A bonus of sorts, but paid as interest.
You can't kind of lend and kind of be an equity partner all at the same time, especially inside an IRA. A mess. As a lender, they will have a lien or trust deed on the property but not an ownership interest. Seems to solve the problem about not signing things. Otherwise, I'd pass. If it's just the money you need, save it up or get it elsewhere @Nikita Khambe. This client may not be worth the headaches at all.
Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 904 votes
9y
And to state the obvious, the IRA will have a second lien position unless they are a member of the LLC getting the loan and chances are it will have to be a non-recourse loan if an IRA is involved.
Check with your CPA and attorney
Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
9y
@Nikita Khambe I wouldn't take the deal. Why not just do "Subject To" to the seller and when you sell the project they get cashed out. My student partner in Austin and I just bought a 3 bed 3 bath in Kyle for $100 down and took over the payment, a few thousand for "walking money" No investor needed, no fuss. (The end profit is $40,000)
I agree with several of the other comment that giving more that 50% of the profit away seems excessive in this deal. Make sure have additional exit strategies just in case is flip is a flop and you cannot sell for a profit. Do you then sell for a loss or do you turn it into a rental?
You asked if you are missing anything important. Have you ever flipped a home before? If not there are many other questions you will need answers to.
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
9y
As a lender in my SDIRA, I don't have my name on anything. I can't. It's the SDIRA funds, not mine.
I have lent and I have bought in my SDIRA. Either are Ok.
In this particular scenario, it seems the SDIRA investor doesn't have (or won't use) funds in the SDIRA to purchase outright. That person should, if they had the funds, buy and then use a contractor to do the flip (or rehab) and a broker to sell the place. That's the 'easy' path.
This is , as @Steve Vaughan alludes to, could be a mess. You will be personally liable for the LLC debt in the event you take on LLC liabilities.
Sounds like the SDIRA guy only has funds for a down payment.
I had a long winded reply (redacted), but unless you have rehab experience, I would pass on anything but straight debt financing BECAUSE you are licensed. No sense in putting your career on the line for a chance at a deal. My 2 cents.