Advice on structuring/financing JV

[Account Closed]

This is my first substantive post, so please be easy on me. :) I want to first be preemptive and make the proclamation that I am not well-versed on partnership structures and creative financing. This is my first flip (and one of my first REI deals for that matter) and I’m partnering with another BP member (@Taylor Jennings) in this JV. We're very optimistic about it. The deal analysis is fairly straightforward, so I'm not looking for justification related to it. Instead, what I'm looking for is more insight around creative options for the partnership itself and financing structures.

Exit Strategy

·Rehab and retail flip

Partner details

Partner #1

- Responsible for funding purchase ($30K-ish or less) – Contract being negotiated.

- Was responsible for locating and getting property under contract

- Has a reputable General Contractor lined up

- Cash on hand is limited, so financing required

Partner #2

- Responsible for funding rehab (rough estimate is $70K)

- In process of creating a Self-Directed IRA (SDIRA) with LLC structure. It may be another 3 weeks before new IRA is fully-funded, so timing could be an issue. This is only source of personal funds.

- Has a relative with sufficient levels of cash-on-hand, who might be willing to offer a private loan (~10% )

Profit Allocation

- Split 50/50 between partners

Challenges

-Bank unlikely to make a loan (to fund purchase) on the state the house is in currently. A minimum level of rehab (e.g., repair holes in wall, stray wiring, etc), ~$20K, would need to be completed to bring the property up to standards in order to qualify for the loan. Only after financing, could the next (and final phase) of rehab take place.

-Timing of SDIRA funding might be too far out for closing. See Partner #2 above.

-Use of SDIRA will limit Partner #2’s involvement (e.g. sweat equity) in rehab due to strict legislative rules.

Potential Alternative Option

1.Private lender (relative) pays for the purchase (~$30K) and takes first position (lien) on property.

2.Private lender loans another $30k to rehab to standards (Phase I rehab). This note needs to have a secured position on property as well.

3.Partner #1 does an 80%+ LTV loan on the house (at this time, the house's Fair Market Value should be around $70k)

4.Partner #1 pays back the private lender the $50k (of the $60K on the original notes)

5.JV then has private lender lend remaining money needed afterwards (Phase II rehab) to get the house retail ready

Like I mentioned above, we're very comfortable with the deal analysis, as there is plenty of room between the cash-in and the ARV. What I'm interested in are thoughts from the forum on what creative and viable options could be created around the partnership, funding (and financing). What are some caveats to consider? Thanks in advance for allowing me to ask this question and getting your input.

[Brian Levredge]

I think the best advice would be to talk to an accountant because there are some potential grey areas using your partner's IRA that may raise some red flags. If you end up using his IRA funds, he can not personally benefit from the project. Furthermore, depending on the relationship of his family member that may lend on the project, he could possibly enter into a prohibited transaction.

To me, a cleaner way of doing the transaction would be for you to pay cash for the property, use it for collateral, and have the IRA loan the money for the rehab in a 1st lien position. You guys can negotiate interest, how the profits will be split, etc. and structure the note accordingly. When the property sells his IRA gets paid back out of escrow and you make your profit.

As an aside, you may want to look into what type of entity you use to flip homes with as well.