Help understanding deals.

3 Replies

So I'm basically new to the game - I've owned 2 properties for 7 years and been renting them, but they started out as properties I bought to live in

Now I'm trying to diversify and invest in RE - but I work full time and don't know a ton about the financing side

I linked up w someone who's an active flipper in the area and discussed possibly partnering on a deal. He manages rehabs and has done some pretty extensive ones.

But - he basically wants me to be the finance guy and he manages the project . And has given 2 options.

For example, he's looking at a project that a 2 family could be had for 200 + 40k renovation.

1) put down 100k which I gather is the down payment plus renovation. For this he's offering 10% -15% return

2) buy the whole thing outright (and then id refinance it) and split 50/50. For experienced investors this seems like not a great deal since I'd be funding the whole thing - but then again I don't have the time or knowledge to go out and do that. We're also in a super saturated market so I don't have leads in good deals.

What do you guys think.

He's saying either way we'd be partners in the deal, scenario 1 wouldn't be lending --> does this mean both of us would be on the deed etc? How does one protect oneself from him taking money and running / not finishing project [obviously I'm going to sit down w a lawyer before we partner up]

What do you guys think? Is this a giant mistake? I really want to diversify and learn along the way 

Hi @Ajay Malhotra

I am just starting out as well but the bigger pockets book How to buy real estate with no(or low) money down by Brandon Turner really helped me. It is short and easy to comprehend. 

I notice that in the first scenario you say 10-15% return? I am thinking you mean that is your cut and he gets 85-90% ? I am no expert but I would flat out refuse under those terms. If the money being risked is all mine the deal is going to be at least 50/50. Depending on how well you know him I would also recommend thinking about having him invest some money in it too so he has "skin in the game." 

Again this is coming from a newbie that doesn't have experience with this but right off the bat a 15% cut sounds ludicrous. Hopefully some more experienced guys can jump in and comment on this. Search what the cuts should be online to get a better idea. 

No wait let me be more clear

1) essentially a lender with first lean

2) buying it - hes sourcing the house and managing the rehab.

I would set out a contract defining the terms of your payout. 10-15% is not a debt interest rate, it sounds like it's an equity return and has equity risk. You should be looking for more than that. If you are strictly a debt investor then read about creating notes, look for 12-15% interest locked in with a lien on the property and a personal guarantee from the borrower. Contact some hard money lenders here if you just want to do a property-backed loan only.

The terms should probably be something like: He guarantees you 8% annualized return on your money and you split 50/50 any profit in the deal after that. For example:

Purchase Price: $200,000 ($55,000 down)

Renovation: $40,000

Total Acquisition $240,000

Cash Out of Pocket $100,000 (your money)

Holding Cost: $5,000 for 6 months

Selling Price: $300,000

Cash Distribution: Selling Price - Loan - Renovation - Down Payment - Holding Cost = $55,000

Your 4% (8% for 6 months on $100k): $4,000

Remaining: $51,000

50% = $25,500

6 Month Return = $29,500/$100,000=29.5%

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