How to structure BRRR partnership vs funding ideas

[Gina Shumway]

My situation may be unique, but I would love people's opinion and insight. 

I created an LLC with 2 other partners last year and we successfully completed our first BRRR (technically close hopefully in a week) and will be get 100% of our investment back (yay!). My two partners were passive investors only. I found the deal, managed reno, found the lending, am managing renter/property etc. As soon as I receive the funds I hope to do this again. I am now trying to determine how best to proceed next.
On the first BRRR as an entity, we all put in capital to pay for the home purchase and reno in cash. The refinance is the only "lending" received. I understand that I can rinse and repeat doing one house individually, but would really like to do two homes at a time. Should I 

A) Break our capital into two and do two down payments, get hard money loan to make up the difference, and then refinance once completed? This would allow me to do 2 homes simultaneously

B) Find more investors and create a separate entity. I do NOT have the personal capital to invest in another home. I will not remove capital from my first LLC as I like the way it is set up as well as my percentage ownership etc. My question is--If I set up a separate LLC to BRR with someone else, what percent ownership should I offer my partner/s and myself? My role would be "sweat" equity with finding deal, purchasing, managing renovation, finding renter, refinancing etc.

Any thoughts appreciated

[Charles Carillo]

@Gina Shumway

You want to be careful when you call an investor/partner a "passive investor;" that gets into the grey area of creating a security.

Instead of setting up new partnerships; it might be easier and cleaner (especially during tax time) to bring these JV partners in as private lenders. You then can have one LLC for yourself (that buys the property) and then the private lender would provide all of the funds (as they have before) but they are getting a set interest rate (paid monthly or when you sell), while also having a mortgage against the property. It is safer for the lender and if after one deal, it is not a good fit, you do not need to close a partnership, pay taxes and pay an accountant; you just move on with another private lender for your next deal.

I feel it is much easier to scale using the private lender model. It also is easier to work with new lenders that might not know you as well. They are making a secured investment/loan.

[Gina Shumway]

Quote from @Charles Carillo:

@Gina Shumway

You want to be careful when you call an investor/partner a "passive investor;" that gets into the grey area of creating a security.

Instead of setting up new partnerships; it might be easier and cleaner (especially during tax time) to bring these JV partners in as private lenders. You then can have one LLC for yourself (that buys the property) and then the private lender would provide all of the funds (as they have before) but they are getting a set interest rate (paid monthly or when you sell), while also having a mortgage against the property. It is safer for the lender and if after one deal, it is not a good fit, you do not need to close a partnership, pay taxes and pay an accountant; you just move on with another private lender for your next deal.

I feel it is much easier to scale using the private lender model. It also is easier to work with new lenders that might not know you as well. They are making a secured investment/loan.

Shoot! Thank you for helping me with terminology. I simply meant to say they strictly invested money and I did all the "work". I will not use that term again. Thank you. 

I will look into this model. So in my holding costs, do I add repayment? If I were to do that I think when I refinance I would rather give them all their money back with interest so I own the property outright. In my first, there was no payback. We all agreed to reinvest the money in the next home. I love that real estate is so diverse and creative, but also makes my brain hurt. Haha

[Joel Forsythe]

Quote from @Charles Carillo:

@Gina Shumway

Instead of setting up new partnerships; it might be easier and cleaner (especially during tax time) to bring these JV partners in as private lenders. You then can have one LLC for yourself (that buys the property) and then the private lender would provide all of the funds (as they have before) but they are getting a set interest rate (paid monthly or when you sell), while also having a mortgage against the property.

Thanks Charles, I've wondered if this was the simplest approach and its seems so. What if the private lender wants to leverage/risk potential profit by offering really low rate and terms? All without becoming actual percentage members of the LLC etc? Does a loan have any mechanism that could tweak its terms for "bonus" interest payments instead of actual LLC profit sharing?

[Charles Carillo]

@Joel Forsythe

Yes, I bet there is however; this is a question best suited for your attorney.