so theoretical, if I got a mortgage on a property to fix and flip, had an investor who wants in. He is willing to to give the 20% down and rehab costs. When we sell what's a fair compensation to him from profits or % on his investment?
I think it depends on the investors tolerance to risk. Is he is looking to just supply capital and see a guaranteed % return after a certain time period? If so then a smaller % return similar to what a HML would charge I think would be appropriate.
If they are willing to take on more risk and if things went south share in the loss then a higher cut of the profits is in order.
I currently operate with an investor in this same scenario. The investor supplies funds to purchase and rehab the property. At the end we split the profits 50/50.
Personally I am confident in my projects enough that I would rather just pay a %. I haven't been able to find my investors willing to put up that kind of cash for a % return that aren't HML and are doing a lot of deals.
If this is your first deal I would recommended giving them a share of profits. This way if things go south your not on the hook to not only pay back the funds they put up but also the % return you promised.
thanks that helps
Where's the other 80% coming from?
A typical rehabber/money partner split is 50/50, but that's assuming the money partner is bring 100% of the money.
I think it really depends on your track record, financial position, and ability to raise other funds. A few years ago when I was starting out I would've given half the profits away for someone to put up the downpayment on a loan, even if I had to sign for the loan and carry a payment still. But that was when I had few options.
If your investor wants to share in the risk/reward of the deal with profit participation, most agree it's fair if he gets 50% of profits if he funds the entire deal. If he's only funding a portion (such as downpayment and/or rehab funds), and you still have to guarantee a loan, I think it's fair to give him 50% of the profits per his contribution. So, if he contributes 30% of your entire investment of purchase and rehab, I'd think giving him 15% of the profits is fair to everyone.
Or, you could partner with him, and both sign for the loan. That would change my opinion as well :)
The other 80% would come from a hard money loan that i would secure.
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