House Flipping Business Models
Hi All,
I am curious as to what type of business models experienced house flipping teams have used to set the foundation for their house flipping business with other co-owners.
Myself and two of my friends are interested in starting a house flipping operation together. Essentially, two of us would be the primary investors (at least in the beginning) while the third member would be the project manager/primary contractor for the remodels. We are still early in the process as we work through all the details. A topic we had today revolved around how to set up the business itself, specifically around the make up of the 3 parties involved. For starters, with two investors and one project manager, what is the best way to set up compensation? Does the project manager get hourly rates? What about money accounts - is it prudent to set up a joint business/personal banking account? etc. I would love to hear everyone's opinion on this broad topic; whats worked and what hasnt?
I am also open to any and all advice you experienced folks would love to share while we're on the topic!
Thanks in advance,
Anthony
@Anthony Simmons I'll start off by saying that I am not a CPA or lawyer, so I wouldn't call my advice professional by any means. But the fix and flippers I know go through the same struggle as you are and I have some knowledge of this. From what I have heard from them, if you set up a corporation, you will have to set up payroll that will get evenly distributed by all party members (3 equal ways in your case). When you create the corporation, you will define the rolls of each member accordingly, but you are subject to equal distribution of funds from the deals you do regardless of whether or not every member was active in that deal.
If you choose to set up an LLC instead, you do not have to pay each member out equally every project should a member or two decide that they don't want to go in on a particular deal or they do less than the rest of the group. You can split is 25%, 25%, 50%, or however you decide to split it. You still have to pay the $800/year regardless. If every member in the group will be involved equally in every deal though, then a corporation could work out for you.
And the way it works in these entities as far as compensation goes, the law literally says you have to pay that person a fair wage based on what their job is. So whatever that means... A CPA or lawyer could help you out with deciding on that figure.
Finally, the fix and flippers I know (one of them being a banker) set up separate accounts for each of their flip jobs to help keep all of the expenses organized and accounted for. I do not recommend mixing business funds with personal funds.
Hopefully that helps a little!
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Thank you for the thorough reply Andy, very thoughtful and helpful!
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Originally posted by @Anthony Simmons:Hi All,
I am curious as to what type of business models experienced house flipping teams have used to set the foundation for their house flipping business with other co-owners.
Myself and two of my friends are interested in starting a house flipping operation together. Essentially, two of us would be the primary investors (at least in the beginning) while the third member would be the project manager/primary contractor for the remodels. We are still early in the process as we work through all the details. A topic we had today revolved around how to set up the business itself, specifically around the make up of the 3 parties involved. For starters, with two investors and one project manager, what is the best way to set up compensation? Does the project manager get hourly rates? What about money accounts - is it prudent to set up a joint business/personal banking account? etc. I would love to hear everyone's opinion on this broad topic; whats worked and what hasnt?I am also open to any and all advice you experienced folks would love to share while we're on the topic!
Thanks in advance,
Anthony
The first thing to consider is if you really want to go into business with friends. This is often a bad idea. Being friends and doing business are very different relationship dynamics and good friendships are often ruined by business partnerships and deals, There are some that do work but usually the opposite is the norm.
That being said you need to decide on all of the roles everyone will play, how decisions will be made, who is contributing money and how much, how it will be spent etc. If the partners are going to be compensated then you ned to all agree on that. You can base it on market rates for that position in your area.
Once you have decided on the basics of how things will work you should meet with an accountant to discuss proper tax structure and an attorney who handles business and contract law to draft your partnership agreement and discuss legal structures in relation to tax consequences as well as all of the issues around a partnership like this.
That is good to point out Greg, thank you for the input.
@Anthony Simmons
You have some great advice in this thread. I found a few articles that might be helpful for you. This article is about what type of entities you can use for a partnership and which might be the best for you. Also, eventually you'll be looking at properties. This article goes over the 6 most important calculations you need to make when deciding on which properties you want to try and flip. Hope this helps.
Best of luck!