So I am in the planning phase of creating a construction/home improvement/contracting company that will work on my rehab projects exclusively, offer services to other local investors, and offer services to home owners as well.
Anybody here have a similar partnership/arrangement with a general contractor(s)? I'd love some input on how you structured the partnership/relationship.
-Do you have a partnership in place?
-Percentage of ownership for investor? Percentage for General Contractor?
-Performance based bonuses for the GC? What's fair?
-Best way to protect yourself (as the investor) from liability?
Mike - I'd suggest thinking about starting small with your contractor(s) with the intent to grow together. But maybe see how the first 1,2,3 projects go first before entering into a longer term contract. You'll learn what works what doesn't and both be prepared to make adjustments.
We partner w/ two separate GCs (two separate geos). We found best way to motivate is to have both get a % of profit from the project - which is their incentive to finish the job as quickly and as cost effective as possible since they now have skin in the game. There's always room for improvement, but works well!
My .02 on the best way(s) to protect yourself:
1) make sure you have a great insurance policy (or policies)..talk to a pro on that one. This alone is worth its weight in gold!
2) Make sure your GC is licensed (if needed by your state) and insured -- if he/she is hiring subs make sure you understand who's responsible for ensuring the subs are licensed/insured as well.
3) Think about if you enter into a contract with a GC if you are going to own this business together or both as separate entities forming a 3rd new entity...definitely worth thinking about the corporate structure here to protect yourself. Could be worth discussion w/ a lawyer.
Thanks David. Yes, the GC I'm going to be working with has done 4 big projects for me this year so far. We're covered on your 2nd point, licensing. Point #3 is what I'm really trying to get a grasp on. I'm thinking about forming a new 3rd entity. My admin team would handle marketing, scheduling, financials, etc., and the GC would handle the bids and jobs.
I like the point you brought up about motivation...% of my deals would be a good way to help them focus on getting the job done on time/on budget.
I should have said first 4 deals together! :)
I'm definitely no lawyer Mike but just from way you describe it, feels like you could be best served creating a new 3rd entity and do a joint venture together as equity partners in that new company.
@Mike Pastor Bad idea. There are several points here on the threads about that, and I have tried a similar route with someone. Apparently I can't cover all the basis, I can cover my end but it seems like investors and other partners will always have a trust issue. This goes both ways, and it is always true that the proposing party gets yhe shorter stick. I suggest you make a construction company by yourself, and if you need to get that licensed, find a way for the contractor to help you get the license, then give him first preference on all your jobs as a sign of good gesture (let me remind you, you don't need to). The problem is, if things go south, who gets who and why? The issue I had was the number of scenarios is in the thousands.
I have such a partnership, and although fairly new, has worked well. I concur with David's comments. We created a new LLC for the partnership and the division of responsibilities and profits are clear. Both partners are motivated by staying on schedule and budget to maximize profit. You can never anticipate every possible scenario, so selection of the right partner is very important.
@Mike Pastor I was a contractor for 7 years prior to being an insurance broker now for 13 years. With that mix of experiences, I'd suggest starting with the following.
1) Form your own company with you being 100% owner
2) Partner with 1 GC and build a good relationship with them
This way, if things do not go well, or you find you 2 just don't work well together, it just takes a quick meting to go your separate ways. A formal partnership would take a ton of work to unravel.
Also, from the insurance side, it's just not clean from a coverage stand point like @Manolo D. references.
The biggest leap that I am willing to take is to partner with someone with good credit at 3% of all contracts that we will undertake. Basically it will extend my project size with just credit and/or cash mix. I also have and want to extend unsecured lines of credit is extended, and could also afford as much as 3%/mo. Now this is from a pure construction company standpoint, you can know and determine why i want this structure instead of simply bringing in someone as a partner and share the risk. One main reason as stated is during separation, it might be costly and who gets what is always an issue, especially if you get a big client, lets say a group of investors that will hire you to flip 5 properties every month. Greed on both sides will start to grow.
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