Proper compensation

5 Replies

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.

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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