Using Partnerships to Fund Deals and Pay Yourself a Salary

TLDR

The biggest obstacle to investing to infinity is the cash in your bank account. A 50-50 partnership where one person brings skills and the other brings money is the simplest way past it. Here is how I structured the entities, paid myself, and kept cashflow under my control.

Table of Contents

• Why Partnerships Beat Waiting for Your Bank Account
• The Partnership Shape That Actually Works
• Investor Company vs Operating Company
• The Operating Company Can Be Almost Anything
• What It Takes to Be a Legit Company
• How You Get Paid
• Control Over Cashflow and Liability
• FAQ
• Related

Why Partnerships Beat Waiting for Your Bank Account

The biggest obstacle to investing to infinity is the amount of cash you have in the bank. That is what prevents you from buying the next deal. You can borrow from a bank. You can borrow from a hard money lender. You can raise money. You can start a syndication and raise a bunch of different people’s money into a private equity fund.

But today we are talking about how you use partnerships to continue to grow your business.

There are different types. A partnership with a buddy where you split up the work, both doing the same thing, is not what I am talking about here. That tends to duplicate effort and create drag.

The best partnerships are with people who have opposing skills. Opposites attract. Or people at different levels of their business.

Let me explain both.

Opposing skills. I have had partnerships where I am the guy who goes out and makes deals and gets things done, and my partner is the operator type. Analytical. Knows how to do stuff on computers. I go make deals. They go make things get done. We both know our place. Two halves make a whole.

Different levels. When I started out, I was willing to go out and do whatever it took. I knew how to make great deals happen. I had a construction company at the time and a lot of contractors working with me. I knew houses. Those are the skills I am always talking about: deals, managing contractors, knowing houses.

I found people who were older. They had money from years in business. They did not want to deal with all that crap. Or people who did not live in the great market we were in, wanted to invest in real estate, but did not have the skills. They brought the money. I brought the skills. 50-50 partnership. Great deal.

Build your skills. Skills are the ticket to the ball game. Once you have them, finding partners with money is the easier half.

The Partnership Shape That Actually Works

Why would a partner with money do this?

Real estate is a young man’s game. Young man does not literally mean young. It means zestful. Willing to go out and bird dog deals and kick tires and manage contractors.

Older investors have been through it. They know real estate is so powerful that even getting 50% of the returns is still a good investment for them. Better than lending money. Better than the stock market. They want to play a part but not do the crap.

You handle the crap. They write the checks. Both sides get what they want.

You are going to continually build your skills because those skills are the ticket. You also need to set up the structure correctly so it is fair for both of you.

Investor Company vs Operating Company

Here is the structure. Not legal advice, just how I set it up.

You have the investment company. You and your partner both own the investment company. 50-50.

The investment company goes out and buys deals. The investor company owns the property at 123 Main Street. The investor does not do anything but own property and write checks. That is all the investor company does.

The investor company hires the operating company.

The operating company does the work. Construction. Wholesale. Real estate brokerage. Property management. Staging. Mail. Whatever operational work the investor company needs.

You own the operating company alone. Or you own a piece of it with operating partners.

Here is the shape on paper.

Pro Tip

Even if you do not have a partner yet, still form the investor company as its own entity. That way when you bring a partner in on your third or fifth deal, the structure is already there. You do not have to unwind anything.

The Operating Company Can Be Almost Anything

Operating companies are not one size. Let me blow your mind a little bit.

That operating company might be a general contracting business. A GC that hires subcontractors: painters, plumbers, electricians. It might hire dumpster companies. It might hire flooring companies.

In the past I have had an MEP (mechanical, electrical, plumbing) company. A handyman company. A dumpster company. Sold the handyman stake because I hated it so much. Sold the truck and dumpsters this year because I needed to focus.

If you are a real estate agent, you might have a staging company. If you are a wholesaler, you might have a mail house. If you do property management, a PM company.

You get it. The operating company can be a GC, a wholesaler, a real estate agent, a staging company, a mail house, a PM company. Multiple options. You build whichever ones support the real estate.

The real estate is your first customer. You know that if you start a dumpster company, at least you are selling a few dumpsters a month to your own houses. That gives you a base to build on.

That is how I ended up with a whole pile of companies. Some I kept. Some I sold. This year I trimmed it way down. solo house flipper model.

The operating company is where you earn ongoing income. The investor company is where you build wealth. Separate them on purpose.

What It Takes to Be a Legit Company

These are legit companies. Not paper. Not shells.

What does it take?

• Form an LLC
• File with the federal government
• Set up a bank account
• Do not co-mingle the funds

That is a legit company. If you are acting as a GC, you need a GC license. If you are doing MEP work, you need the appropriate licenses. Your municipality probably requires a business license. But that is all paperwork.

I almost did not include this section because I do not want to make you feel overwhelmed. You do not have to do any of this crap.

You just go buy a house and make it better and then sell it. That is it. Could be that simple. Get great deals, make them nicer.

But if you want to grow, this is the structure.

How You Get Paid

Now back to the partnership.

When the investment company at 123 Main Street needs to hire somebody, why can it not be you? It can. And that is a great way to pay yourself as the person doing the work.

You have operating companies. Operating companies get paid for the work they do. If you open those operating companies up to the public, which is what I chose to do, the investor partnership side gets deep discounts. Whatever you agree with the partners.

That is how you get paid today. That is how you get paid for the actual job you have.

If you are waiting to make money only at the end of a flip, you will wait 6 months. If you pay yourself through the operating company along the way, you have income.

Key Concept

The partnership gives you investment returns at the end of the deal. The operating company gives you salary along the way. You need both or the cashflow does not work for a solo operator.

Control Over Cashflow and Liability

Two other benefits to this structure.

Liability separation. The operating company has more liability than the investor company. You are active. You hire people. Somebody falls off a ladder, something bad happens. You want to protect your investment by keeping it in a separate entity. That is why you do not do construction out of the same LLC that owns the real estate.

Cashflow control. One of the biggest problems in real estate is flip cycles. By the time you buy, renovate, wait on the market, and close, it might be 6 months. Great, big lump of cash. If you refinance, maybe no cash at all. With the operating company, you control the cashflow. You get paid along the way.

I love controlling how things move around.

Simple Path to Get Started

Partnerships are a great thing. That is how I was able to expand my business.

You do not have to have them. You could just buy a house, get a hard money loan, use your own cash, get a bank loan, put extra down. No partnership.

You could not set up any of this and just run everything through a single LLC. Or just have the investor LLC where you buy the house. I would at least take that step. Form an LLC. Set up the bank account. File federally.

It is way simpler than you think.

Start with one LLC. Add partnerships and operating companies when the deal flow requires them. Do not overbuild the structure before you have the deals.

FAQ

When should I bring on a partner?

When your deals have outpaced your bank account and you have a skill the partner does not have. If you are still learning the skill, do not bring a partner yet. You will spend their money inefficiently and damage the relationship.

What split is fair?

50-50 is the most common when the skills side also brings the time. If the money partner contributes 100% of the cash and the skills partner contributes 100% of the time and expertise, it is usually 50-50. Adjust if the contributions are unbalanced.

Do I need separate LLCs for each property?

Not required but common for liability separation. Most solo flippers own their first handful of properties in one LLC and split them out later. The cost is a few hundred dollars per LLC per year. The benefit is isolating liability.

What is the difference between the operating company and the investor company if I own both?

The operating company is where you do active work and have active liability. The investor company owns the real estate. Keeping them separate protects the real estate asset from operational lawsuits. You own both but each has a different job.

Should I bring a GC license partner into the operating company?

If you want to pull permits and do the work in house, yes. If you are just hiring subs, not necessarily. Most solo flippers do not need their own GC license in the early years. They hire a GC when the job requires it.