BiggerPockets

Here are some simple hypothetical parameters:

Acquisition: $200,000
Rehab, Holding, Selling costs: $40,000
ARV: $270,000

Funding:
Hardmoney: $150,000

How would you split up the remaining equity funding ($90,000) if you split the profit with a GC?

Yea, I didn't think too hard when giving those numbers.

So basically GC takes care of all the cost to rehab, I fund/find funding for the rest of the costs, then split profit 50%/50%?

I agree with what Mike is saying but your contractor might be able to save you a ton of money on the construction costs because of inside connections and cheaper costs on materials. Just a thought since he's potentially an equity partner. You might be able to get more aggressive for the purchase price. Otherwise, the 70% minus repairs is definitely a good starting point.

For our hard money loans in California we often roll in repair money and do two releases. The contractor, under @Mike LaCava's scenario, would be out-of-pocket 50% and would send in pictures when the repairs are 50% complete to get 50% of the repair money out of escrow. Then he'd complete the next 50% out-of-pocket and then only get the final release of money when an inspection of work has been completed. An arrangement like that might be perfect for you because it's an extra set of experienced eyeballs on the project to make sure the work is getting done. If it's not and the contractor walks away, at least not all the money for repairs would be gone. I see you're in Mass. so have no idea what hard money is like out there.

If your contractor has no money, I'd be a little concerned for you. I'd prefer to see you hire a general contractor for a few days and come up with some project templates, cost breakdowns, likely issues with houses in your area, etc. From there, perhaps there's a bonus with some share of equity but not 50/50. I think it depends on what he's bringing to the party.

My thoughts, I have done quite a few partner deals where I was the GC. If the I always expected the money partner to put up all the money "interest free " if he expected me to provide my labor for "free".

If we had to pay interest, especially hard money rates, i expected to be paid for my work and we split the profits after that. In my case I was always the finder of the deal, the stager the gc, laborer and the seller, in essence I ran and controlled the project from start to finish and I tended to see my money partner as the bank.

Everyone brings different skills and abilities to the table, so every deal has to be structured to satisfy that.

My perspective.

In the scenario, I am finding the deal, and managing the sales process and arranging the financing minus whatever the GC brings to the table

@Sean Brennan, that will totally depend on your arrangement and how much money you personally have in the deal and if you're making hard money payments. I'd say as long as it ends up being a 50/50 split in money out of your pocket and labor/materials on the GC side, I think that could work.

Thanks guys, I appreciate all your thoughts.

@Ann Bellamy Don't worry, I am very cautious... I'll be vetting any GC I decide to work with very carefully. I plan to network for a few months to figure out who are the reputable players. I am also going to try to make the Nashua REIA and the BostonREIA meetings... Do you go to those?

Some great thoughts above, I am going to take devils advocate position here. I am not a fan of partnering with the GC and here is why: What incentive does he have to keep the rehab costs down? If he has the cost of one item at $1000 when it could have been $600, he pockets $400, then only splits the balance cost of $600, thus his cost from his profit share reduced by $300, yet he pocketed $400, creating a net gain for himself.

Secondly, if a GC is going to be a partner, he better be bringing more than a construction team at " cost" to the table and should be bringing cash or rehab and acquisition.

I personally would rather JV with another investor who was a money partner so that we both have same goals and incentives to keep costs down, liquidation quick, rehab quick, etc.

Just my .02 cents.

First, unlike some vendors a contractor must be carefully managed. Contractors, whether they're GCs or subs are a different breed. Having one as a partner could work but put it in writing.You're also dealing with project management here which means you, as the other partner need to be involved at every step.

Second, Will Barnard (see his post above) is giving great advice by questioning the contractor's incentive to "keep rehab cost down".

How true!

But let's not limit his way of thinking to contractors. It's smart to consider the role and function of each partner. What's their incentive? What are they getting out of this? How do they benefit?

Is it a good idea to leave a task or function entirely up to a partner completely unchecked? Make sure its in writing and they're held accountable.

Originally posted by Will Barnard:
Some great thoughts above, I am going to take devils advocate position here. I am not a fan of partnering with the GC and here is why: What incentive does he have to keep the rehab costs down? If he has the cost of one item at $1000 when it could have been $600, he pockets $400, then only splits the balance cost of $600, thus his cost from his profit share reduced by $300, yet he pocketed $400, creating a net gain for himself.

Secondly, if a GC is going to be a partner, he better be bringing more than a construction team at " cost" to the table and should be bringing cash or rehab and acquisition.

I personally would rather JV with another investor who was a money partner so that we both have same goals and incentives to keep costs down, liquidation quick, rehab quick, etc.

Just my .02 cents.

Will, I see where you're coming from, but I could only agree with your scenario if trustworthy contractors didnt exist. They DO exist. And I would think that by the time a decision is made to partner, a level of trust has already been established. If the GC signs the agreement stating he will bring materials in at his cost, whether that be at wholesale or retail, he should be trusted to do so.

These are details to work out, but if an investor has an established pipeline to plug properties into, I guess he wouldnt look to partner with a GC in the first place. Consider a scenario from the GC's perspective...

...The GC can save a crapload of money on materials and says that because of the high cost of the money the investor brings to the deal, he thinks it fair to charge the rehab retail for his materials. If he floats both labor and materials at cost, and then the investor cant move the property untill 180 days past projection, what then.

Ideally, we would all approach our business dealings from a position of strength. A GC worth his weight looks to do the same. The challeng, once a relationship based on mutual respect and trust is formed, is in crafting an agreement that covers any and every eventuality and reflects the true picture of their strengths and what each brings to the table.

I guess the bottom line for me is that if you cant trust those you need to run and grow your business, you resign yourself to flying solo, putting a whole lot of energy into babysitting, and only grow your business at a rate you can manage thru your own resources.