Which to pick: Investors or Loans?

Question

When is it beneficial to take on loans versus taking money from investors when flipping houses? I am an aspiring real estate investor who is interested in both investing in other flippers and also creating my own flipping business. Is it normal for a partnership to form between a house-flipper (someone who finds deals, buys property, restores the property, and sells) and an investor (brings in the needed capital to buy property)? If so, how does the partnership work, is there a norm in the percentages that the flipper makes versus what the investor makes?

Johan Adler · Answer

Hi, thanks for responding. My friends are willing to split the profits because they are not doing any of the work required to flip the house. I would be the one who finds the house, makes the needed renovations, and then resells it. I am also putting some of my own money into the flip (just not as much as my friends)

Bill B. · Answer

As long as you’re cool with losing your friends if you don’t pay them back every single cent you borrow, I guess that’s one way to go. I don’t see how anyone who had it properly explained to them would be willing to split profits while taking 100% of the losses.

Johan Adler · Answer

Hey, @Curt Davis thank you for responding to my questions. I am mainly interested in seeking out investors not lenders so if the flip incurs a loss I will be somewhat protected as I will not have to pay back the investor as with a lender I still would. It would seem to me that this model is better to start off with. However even when going to scale (meaning this is a full-time gig), if you are trying to flip 5-6 houses a month wouldn't it be better to take on an investor rather than a lender? The only downside that you raise is the lack of trying to find an investor. However, I have a couple of friends who wish to fund my flip. They are not interested in lending the money but rather are interested in a percentage of the cut. Right now it is three of my friends and me. We have all agreed to split the profits evenly. I am just making sure that this is something that won't bite me in the end.

Curt Davis · Answer

There is not really a partnership. One person acts like a hard money lender and the other finds, fixes, and flips their own deal.  You might find a partnership like this with someone who is new but not an experienced investor in most cases.

Good luck