Tonight I had a meeting with an acquaintance about getting involved with their property fix and flips. They have been buying properties with cash, fixing them, and then selling them. They have been limited in number of deals they can pursue because they can not qualify for a loan. They are proposing having me take ownership of the properties (I have great credit and a W2 income) using their money for a down payment. This would enable them to leverage the banks money and work on more properties at a time.
Is this type of partnership a good idea? Would banks go for it? What are some red flags? How should the partnership be structured? Any ideas, information, or discouragement would be greatly appreciated!
I have multiple lenders like this, for them it's a much better income thn rental properties And much less headache.
The structure I have with two of my lender, they are borrowing at four and a half percent from the bank I pay a total of 10 percent so they're making 5 .5 percent , on that money. Pretty sweet deal if you have a good partner. also charging them 12 percent annual interest and a 1,000 To 2,000 loan Fee is not unreasonable.
You need to be aware of ALL the risks before you make your decision. You are taking on the risk of the entire loan amount. A lot depends on your total assets and how that relates to the loan amounts you will be at risk for.
Many new investors overlook some unusual, low probability, but real risks. Just to give you an example of some I have come across in the 500 plus deals I have done:
- Fire burns down the structure. Insurance company not liable because arson involving borrower. Borrower disappears.
- Title issue arises. Title company goes bankrupt. State insurance funds empty.
- City inspector won't provide okay on permits. Fight drags on for a year. One night city demolishes structure as dangerous building
- Workman hurt on property. Sues property owner for amount in excess of insurance courage.
I am not suggesting that you pass on the deal, or that the chances of the above scenarios occurring are anything but remote; just be aware that there are risks that cannot be adequately insured against.
A wise and experienced caution from Don.
Another is to remember that all partnerships end - some end well, and some messy, but they all eventually end. If you decided to pursue this, before any money is invested, speed a little to sit down with an attorney, and possibly your accountant, to draft a partnership agreement which provides guidance for operations, disputes and dissolution that is fair and clear to both parties.
Thank you for the replies. It is so cool that people here are so willing to help out!
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