Potential Partnership Structure

20 Replies

So, I may have found myself a financial partner. Basically, he has all the money, and I have all the time.

He currently owns 18 properties and is a Doctor, with very little free time.

Basically, I proposed to him that we could start out with a small, cheap flip- where I would find the deal, off market or on market (I am a full time realtor) and I would manage the entire flip from beginning to end, then could list the property since I am a realtor too. We would be looking in the Philly market.

How would you recommend structuring this partnership?

Personally, I believe in 50/50 partnerships most of the time. You couldn't do the deal without his money, and he couldn't do the deal without your time. Also, if you plan on partnering with this individual long-term, I think a 50/50 will induce less strain on the relationship.

@Miller McSwain I agree. He proposed the idea of structuring it so that he gets 10% return on his total investment since he will be funding the entire deal- then we split the profits 50-50

You need to find what makes you most comfortable. If your partner values your contributions at 50%, then you should make it a 50/50 split. However, I have seen people commonly factor the "money partner" as a 70% partner. The laborer partner or operator typically gets 30% of the deal in these deals. 

simple! offer him a preferred interest payment for using his money.......on the net....then split it 50/50.


so if he put up 100K.....

you net 100K....

lets say you offered him 10% on his money......after his initial investment was given....he would be owed 10K out of that 100k Net.....then it would leave 90K.....yaw would then split the 90k 50/50.......


so in the end he would have 55k.....and you would have 45k.......because you offered him 10% interest on his money

@Brandon Ribeiro I would structure the deal as a straight 50/50, your time VS his money. You could always pay another private investor 10% on their money and NOT have a partner at all. On the 100k net profit example used already in this post. He invests 100k for a potential of his 100k back and 50k profit you invested your knowledge and time for a 50k profit. If he wants anything additional then you take your 3% commission and you may wind up even again. Just clear the muddy water by doing a straight up 50/50 deal. That’s my .02

That is word for word what we have both agreed on. He would get 10% on his investment, then split the rest 50/50. I would also be getting the selling side of the commission since I’m an agent.

how would you handle capital gains tax in this situation?


Originally posted by @Kerry Noble Jr :

simple! offer him a preferred interest payment for using his money.......on the net....then split it 50/50.

so if he put up 100K.....

you net 100K....

lets say you offered him 10% on his money......after his initial investment was given....he would be owed 10K out of that 100k Net.....then it would leave 90K.....yaw would then split the 90k 50/50.......

so in the end he would have 55k.....and you would have 45k.......because you offered him 10% interest on his money

 

Originally posted by @Brandon Ribeiro :

@Miller McSwain I agree. He proposed the idea of structuring it so that he gets 10% return on his total investment since he will be funding the entire deal- then we split the profits 50-50

He will be funding the entire deal and you will making the entire deal happen, and remember, time is money. So determine if the amount of time spend doing everything will be worth your time and money. There are plenty of investors simply looking for a return on their money and nothing more.

Forrest

 

so just have him 1099 you at the end of the year....because you will probably have more flips to do....

Originally posted by @Brandon Ribeiro :
That is word for word what we have both agreed on. He would get 10% on his investment, then split the rest 50/50. I would also be getting the selling side of the commission since I’m an agent.

how would you handle capital gains tax in this situation?


Originally posted by @Kerry Noble Jr:

simple! offer him a preferred interest payment for using his money.......on the net....then split it 50/50.

so if he put up 100K.....

you net 100K....

lets say you offered him 10% on his money......after his initial investment was given....he would be owed 10K out of that 100k Net.....then it would leave 90K.....yaw would then split the 90k 50/50.......

so in the end he would have 55k.....and you would have 45k.......because you offered him 10% interest on his money


 

 

Originally posted by @Brandon Ribeiro :

@Kerry Noble Jr can I just get my cut at the end of the project? 

 Yes! You'll get your cut at the end of each project but as far as taxes....he will 1099 you at the end of the year.......

Originally posted by @Brandon Ribeiro :

@Kerry Noble Jr he said he wants to figure out the capital gains tax before arriving at the net we each get. So I guess we would have to see a cpa about that

 This will be more ordinary income for him on both the sale of the inventory and interest on lent money, not 'capital gain'.

I'm sure as a doctor, receiving more highly taxed ordinary income is exactly what he needs. LOL

Great partnerships optimize each other's tax positions. You could use income. He could use depreciation and 'losses'. Get more creative.

Originally posted by @Brandon Ribeiro :

@Steve Vaughan so what are you suggesting?

Just to consider different tacts than flipping.  Sometimes we get entrenched in one idea, not considering he will lose 40% (or however much) to taxes when the dust settles.  

Sounds like a good partnership scenario, there's just more that can be done when one partner has a completely different tax scenario than another. Discuss with your real estate tax strategist.

Originally posted by @Brandon Ribeiro :

@Steve Vaughan great, thank you. Are there any specific strategies that you have in mind with this type of scenario?

Sure.  I'd just ask my tax strategist what the best scenario might be, not specifically mention flipping to avoid suggestion bias. 

I learned long ago not to share my tax-related thoughts on here.  I was pushing it with my initial post. 

 

@Brandon Ribeiro I would suggest to set up an entity - LLC or S Corp typically. There are numerous ways to structure as previously mentioned, which is why your CPA would need to handle. Your doctor friend could do a loan to the entity plus have a a JV agreement for the 50/50 profit split. That keeps the entity 100% yours and front end branding in your control. If you're the face of the biz, then it's a good idea to keep in mind the long term value of having your own brand. But if you plan to stick with the doctor long term, then I would just have him in the entity with you. 50/50 owners of the entity. Then try to convince him to take the 10% loan part out of the equation.

Either way is good, just get everything in writing, and have clear exit plan. Meaning, the entity docs should be called DISagreement Docs because you only will need them if there is a disagreement. So what’s important is that if you partner with anyone in an entity you want to have clear steps to follow if the entity is to break up , someone leave, etc. Sometimes these are covered in the Operating Agreement or By Laws. Good luck!