Flip partnerships - what structure?

[Tom Camarda]

HI All,

I may be partnering with someone on a SFR fix n flip. Whats the best way to structure this? I would be putting up 50% of the funds needed to buy and rehab. Guessing we should start an LLC and do 50/50 membership ?

Thanks,

Tom

[Jeff S.]

“This will be a cash close, so 1st position lien is a good suggestion. I am bringing 50% of the purchase and rehab cost in OPM. (Hard money)”

50/50 deals will almost always cost you money, @Tom Camarda. And partners will drive you crazy. If you are putting in 50% of the purchase money, guaranteeing the rehab loan alone, and doing all the work, it does not seem fair to you that your investor takes 50% of the profit.

Though there are lenders that specialize in second-position rehab loans, most who make these will expect to be in first position. Thus, your 50% purchase money investor will likely have to take second position as a lender or be named as a member of the LLC you should be using. Your lender will expect both of you to guarantee the loan, thus putting both of you on the same footing. Even under this scenario, with a 50/50 split, you will not be getting paid for doing all the work.

Another option would be for you to put in 50% of the purchase price using an LLC that you own 100%, borrow the remaining 50% from your investor as a 2nd position loan at a fair interest rate with points, and borrow the rehab under your personal guarantee.

Better, if you can find a lender who will lend to a newbie, and they are out there, you could borrow the purchase money using some of your cash as a down payment, as well as all the rehab funds using a construction loan. Much cleaner.

Run the numbers and you’ll see that borrowing is almost always cheaper and less complicated than giving someone 50% of your profit.