I’m considering investing in real estate in northern California. I have a close friend who is a general contractor and we are looking to rehab homes with my capital and his sweat. He won’t receive any money during the rehab. We intend to split any profits 50/50. Does this split seem reasonable?

Since the purchases will be made with my money and my credit score (804) I’m wondering how to divide the profits so that they are appropriately accounted for during tax time. How is this usually done? Do I simply write him a check for half of the profits and remind him to account for it on his tax returns? Or is an entity (LLC, partnership, joint venture, or something else) the only preferred way to go?

What if my friend and I decide that although my capital can cover the down payment and carrying costs, we will need other investors to help with the rehab costs? For example, if we have 4 people putting in 5-10K each, how then we divide the profits and account for them on our respective tax returns?

In any of the scenarios above, would it make sense for me to buy the home and then add my contractor friend and/or others to the title after the sale?

i imagine that there are groups of people who pool their money together to purchase and rehab homes without forming an entity. i wonder how they distribute the profits.

If anyone has experience with any of these questions, I would appreciate hearing your thoughts. Not to be rude, but answers that suggest contacting a real estate attorney and a tax accountant are not helpful. I am aware of these options and will proceed accordingly if I cannot find answers in a real estate forum.

Thanks much in advance for sharing.

Well not to be rude either but you have infinite variables and many possible ways to structure this,and if you would put an 804 credit score at risk and not even use a re tax attorney or similar,you will lose in the end alot more than you gain.Don't be cheap,just make sure you get value for your dollar.

A few things i have learned:

1.Always overestimate the cost of repairs,if the cost is less you made more money,if it is more you planned for it and do not find yourself upside down or breaking even on the property having to now rent it out.

2.In my opinion follow the kiss rule,the more people you add to the mix(investors)the more opinions(crap) you will get that will hinder the process.The less people in the equation the better in my opinion.

3.If it is a marginal deal walk away!,alot of times investor get the "trigger happy" syndrome and get impatient and just want to "buy something"they end up justifying it in there minds and end up working hard to break even or eek out a profit in a marginal deal.It's much better too look at it as a business with no emotion,you are much better off waiting for the right deal to make 50k,then buying now and having your cash held up in a marginal deal while the deal you were looking to get passes you by.

good luck

thanks for your reply. maybe i was not as clear as i intended to be when i posted my queries.

i didn't mean to suggest that i would want to be cheap. rather, i want to be efficient. i am attempting to gather information from this (and other forums) prior to contacting a real estate attorney. i feel the more i know/understand about the possibilities before consulting with/hiring an attorney (or anyone for that matter) the better off i will be.

i was also trying to make the point that forums like this would not be of much value if all the answers to posted questions were, "consult a real estate attorney." know what i mean?

and not be rude (maybe this could become a theme) again but your suggestions, although valuable, do not seem to get at the substance of any of my questions.

trully, i'm not trying to be snippy (i realize tone can be hard to determine in writing), just looking for answers to my potential situations.

It sounds as though you're trying to create a multi-person joint venture. There are definitely lots of ways to get that done, depending on the number of people you have and whether or not this is a one-time shot or a long-term venture.

Here is how I do it when I have friends who want to "invest" in my deals. My company buys the properties. My friends give me cash to help with rehab or acquistion costs. I give each a promissory note for whatever rate of return we agreed on. It's usually a fixed percentage per month or year, and has a maturity date of 6 or 12 months. At the end of the year, each investor gets a 1099-INT from me for the total interest payments they received. This works great when I have a bunch of people who all have different amounts of money.

If you are looking for true partners, or a long-term venture, an LLC or S Corp might make more sense. That way, each investor is a true partner (though hopefully a silent one!) with a different percentage stake in the company. At the end of the year, the company will prepare IRS K-1 statements (Partner's share of income). They will simply pay taxes on their personal returns as income. With either of these entities, you want to make sure you set them up in such a way that your money partners are treated as passive investors only, otherwise they may get hit for self-employment taxes. This is more a concern with the LLC than the S-Corp. Also watch out for California LLC taxes. I'm not that familiar with California tax law, but I have heard that LLCs can be problematic there.

Try to avoid putting individual people on title taking title in anyone's personal name. And absolutely stay away from a general partnership. Either of those can be potentially devastating if there are any disasters.

Good luck!