Question on the below scenario
I was browsing the BP market place and found a property for sale in the market area i usually invest in, i recently moved away. I reached out to the seller and recieved information about the property, upon further discussions found out he had it under contract but could not finance the deal, so we disscussed partnering on the deal. Number are 140K purchase price rehab budget 10K no labor cost and ARV 215K to 230K. I currently live out of state and he is local. I will finance the deal with the cash and credit score and he found the deal and is pretty handy, he will do the work and manange the property we are looking at forming a joint LLC. Long term hold with everything split 50/50, including cash after refi.
What are some ways of structuring this partnership?
What are some ways we protect each others interest?
We will use hard money and refi into a conventional long term loan( BRRRR) any advice will help?
LLC vs joint venture agreement, what would be best?
Thanks for the help BP family!
I'd probably do a JV in this situation. I'd find out how much experience he has both in fix and flips and rentals and verify it. I'd definitely do a background check. Have you run the deal by an HML yet? 10K is typically a red flag. People generally don't trust an investor that tells them they can do a rehab for just 10K. What's the distress on the property? It's unusual to do 10K work and get that kind of an increase in ARV.
We would like to help with your discussion making process.
We would like to answer any and all questions you might have on the HML side and some creative ways to finance it.
I'd say JV, UNLESS the other guy will have actual employees working under that umbrella. Then I'd want the LLC.
what would be the benefit of a JV? We are in the process of working with a HML, I have discussed the deal with them, but they are waiting for the LLC to be formed. The property is a triplex, it has a duplex and a SFH on the same lot. Both units of the duplex have been completely rehabbed by him and rented out, the SFH is in need of the rehab, but is livable and currently has long term tenants.
Most HMLs will work through the deal with you with the understanding that you know you'll have to purchase in an entity. A JV is good for more transactional deals and more informal. If you think you're going to do a lot of deals together you can go the LLC route, but it'll generally cost more and you may discover you don't fit well together. As far as the entity you can create one for yourself and he can JV with your LLC on the deal.
He owns the duplex, but not the SFH? If it needs such little rehab and is already tenanted why bother with the HML? Why not just go straight to the long-term mortgage and skip the refi and all the costs of closing twice?
Also, the property will be a long term hold with everything including cash flow split 50/50, with a JV versus a LLC proper accounting of the income and expenses, what do you recommend for this?
@Odie Ayaga he has attempted to close on the property multiple times, but the SFH will not pass a home inspection in its current condition. He does not own the property, he has it under a lease option where he controls the duplex which he fixed and rented out. He has an option to buy the whole property, but prior to doing the work on the SFH he wanted to own it.
Regarding the accounting of income, expenses, etc I recommend talking to an accountant. That's treading into the territory of a professional giving you the best answer to that question and preferably one you plan to employ.
I'm assuming the 140K would be for the entire property then. Any chance you can pay that in cash and use delayed financing after the rehab to refi your money out? Would the seller be willing to sell the SFH separately now and the rest after the work is done? Sorry for all the questions just trying to figure out what best suits the situation.
I obviously know nothing about your future partner but reading what you wrote above, I would run a thorough background check and figure out a way to insure myself in every possible way.
As the first deal together, I would offer your partner a finder's fee and paying his labor costs but I wouldn't go in 50/50 just yet.
It's the combination of no funds, bad credit, almost too good to be true deal that make me say this.
I'm the partner in this deal!! To add to this and to make things simpler. We are simply trying to see about setting up an LLC for the property in the simple from of going through the state (va) online and just paying the online fee to register our business instead of going through a Lawyer to draw up a the articles of organizations...and paying more. With that said we use the joint venture agreement as a type of Articles of organization that structure of business. We just want to see what others did in this situation here in our lovely BP community.
What Odie said.. Quicker.. easier. If its one property, I don't know that I'd bother with the LLC. However, if that works out and you BRRRR with him, then the LLC starts making a bit more sense, even if just the tax handling .. The LLC will take somewhere around 2 weeks for the state (unless you pay the expedite bribe)