Hard money or bring on a partner? What would you do??
Real Estate Agent · Blackwood, NJ · Member since 2013 · 38 posts · 7 votes
Hard money or bring on a partner? What would you do??
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Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
10yOriginally posted by @Jean Taveras:
If he just wants a return on his money, he won't be doing anything. I would give him 20%.
I'm curious how many investors you've found to take all of the risk for 20% of the profit?
18 Replies
- Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes10y
Run the numbers, @Terry Brennan. Depending upon how well you buy and how fast you can complete your project, a hard money loan will cost roughly 25% of the profit. This is cheaper than the 40% you will pay this partner.
The lending business is very competitive. After you've developed a good relationship with the right HML, you might be able to obtain 100% financing from them and maybe find them easier to deal with than an investor. Realistically, in this market, you'll probably be constrained more by the lack of viable inventory than money.
Unless you have a burning desire to work with this partner, let the numbers tell you what to do.
- Real Estate Agent · Blackwood, NJ · Member since 2013 · 38 posts · 7 votes10y
@Jeff S. I do not have a burning desire to work with this partner. I have always been a loner. The big benefit to having the partner is that it directly connects me with the money I am missing in my business! This partner has just about limitless funds, and is willing to invest everything with me . Having money available at the snap of a finger takes a lot of stress out of my business. As I run the numbers though, Hard money is the cheaper alternative but considering with the partner I will have nothing out of pocket, I technically have nothing to loose. My risk in each transaction is minimum. Having a wife and kids that depends on me makes me always want to take the safe side! What would you consider to be a healthy split for a partnership? I bring the knowledge, experience and contractors, he brings the cash...
- Property Manager · Palm Beach Gardens, FL · Member since 2015 · 111 posts · 27 votes10yIf he just wants a return on his money, he won't be doing anything. I would give him 20%.
- Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes10y
Originally posted by @Jean Taveras:
If he just wants a return on his money, he won't be doing anything. I would give him 20%.
I'm curious how many investors you've found to take all of the risk for 20% of the profit?
- Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes10y
If everything goes right and you sell it quickly then hard money will probably be a better option, but that rarely happens as you probably know since you've done a few flips. 50% is usually the common split from what I've seen so getting some one to take all of the risk for 40% of the profits is a good deal.
- Property Manager · Palm Beach Gardens, FL · Member since 2015 · 111 posts · 27 votes10y
Easy, I have a network of FA's at the bank where referrals are a revolving door. I refer them business and they refer me business. The want to make a little bit more on their investment without moving a muscle and I use capital for flips, I assume all liability, work and selling of property. They will technically hold a note on the property.
- Investor · Sparks, NV · Member since 2015 · 18 posts · 3 votes10y
Originally posted by @Terry Brennan:
@Jeff S. I do not have a burning desire to work with this partner. I have always been a loner. The big benefit to having the partner is that it directly connects me with the money I am missing in my business! This partner has just about limitless funds, and is willing to invest everything with me . Having money available at the snap of a finger takes a lot of stress out of my business. As I run the numbers though, Hard money is the cheaper alternative but considering with the partner I will have nothing out of pocket, I technically have nothing to loose. My risk in each transaction is minimum. Having a wife and kids that depends on me makes me always want to take the safe side! What would you consider to be a healthy split for a partnership? I bring the knowledge, experience and contractors, he brings the cash...
So if something goes wrong, you lose nothing and the investor providing you with the funds is taking all the financial risk? You ought to be giving the investor 60% since they are the one with something to lose if the deal isn't profitable.
- Rehabber · Smyrna, GA · Member since 2013 · 864 posts · 510 votes10y
Both work, actually. I do both pretty regularly, and bring the money on JV deals and split profits too.
Here's what so many people miss with this "its cheaper to borrow" stuff, once you get to 100% financing its more about a return on time than anything else. Just do bigger and/or more deals to cover the split difference. Plus, once you get to 100% financing with someone else running your rehabs, guess how nice your life can be?
Finding them and funding them is where you should be spending your time once you know what you're doing, that's the part you can't really outsource. The rest of it you can pay someone else to do for you. If you can get them funded at 100% with minimal supervision you can up the size of the deal and up the volume without much additional work. I'm running 9 right now, well 6 active, 3 are newly on the market. I might have put in 3 hours of work today. Don't get me wrong, I have my 17-18 hour days too, but I'm not exactly overwhelmed with those numbers and I have zero of my dollars in any of them.
Jeff is spot on, in this environment, the deals are harder to come by than the cash. In most markets, anyway. It was the opposite in 2012.
On the split stuff, I personally don't do them when I bring the money unless the split is 50/50 and the profit is over $50k. Borrowing I pay my institutional lender (who I broker for) 2pts and 8%. I pay my private lender 2pts and 12%, but no payments there and he lets me put 2nds behind the institutional stuff if I want. I'm about 70% private money and 30% institutional money right now, its more expensive, but way less headache once the relationship is there. I could probably borrow for less, but I like to keep him happy so he says "sure" when I ask if I can borrow $360k by Friday on a Wednesday (I literally asked my guy that on the way back from a bar 3 months ago...got the money, bought the house and filed the security deed a month or so after. This is very much a relationship business)
Anyway, my advice is to go to the money guy and say you want to do business together but you are looking to structure it more for as a lender than a partner. You want to be the one picking paint colors and at what price to sell it at and you don't want to have to worry if you buy tools at Home Depot and bill it to the rehab, which is fine with a lender, but theft with a partner, etc. Also explain that it'll keep your relationship better, because there will be cost overruns and surprises and as a lender, his return is unaffected. Say something like "is there a rate of return that'd you'd be real happy with knowing the loan is secured by real estate at 70% of its value?" Mention the stock market is losing $ right now, then offer 2&12 or whatever.
Happy to talk you through what I do if you want to ring me up sometime.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Jean Taveras you will have to excuse me but can you tell me what FA is in context with this subject
@Terry Brennan here is how I look at it.. I have been a HML for about 30 years now.. having depending on the RE cycle 30 to 50 million to lend.. So I get the HML angle and agree with @Jeff S. that a great relationship with a HML is very valuable .. I cherished my long term clients.. and I have had them going on two decades. I had a company in Oakland CA that I ran under my CA broker license and one in Oregon which requires full NMLS mortgage banker status. So we are highly regulated.
I decided 3.5 years ago to put my Mortage banker license on ICE as well as my brokers license and take the capital I have which is fully 8 figures and ONLY do JV deals.
Why you ask... well you have two kinds of borrowers or partners ones who have responded here that simply look at whats cheapest and go with that
And then you have others that want to really scale up.. If your capacity is to only do 3 to 5 flips a year then HML is probably the route to take.
But if you want to do volume then a capital partner in my mind is something to consider.
My clients do volume... because I am a capital partner they pay no FEES Points etc up front. they pay no monthly payments... This is huge when you want to scale. if your borrowing and have to make payments this constricts your growth.. plus puts a lot of stress on a person... and god forbid you miss a payment.
So real world examples:
One client in the deep south I have purchase and provided rehab for 140 properties for them in the last 28 months. I also arranged the take out ( long term loans.) so now they have a monster portfolio and they put not ONE dime of their own capital out.. but did they work their @@s'a off buying and rehabbing all these units you bet.. their positive cash flow now is about 25k a month and growing I am closing a 12 home purchse for them on Friday not one dime out of pocket and all rehab funded.. NO HML would even come close to considering that.. But I earn TWICE what a HML earns.. so I take risk but I do far better than when I was a HML.. many of my deals I make over 100% APR compared to a measly HML at 2 points and 12%.. but my guys got smoking deals and they pay me off in 90 days so the total dollars are nothing.
So you can go either way.. and I have about 20 clients like this. and I have no website and do not advertise and have more business than I can handle.. ask any HML about deal flow today...
- Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes10y
"They will technically hold a note on the property."
No, they won't technically hold a note on the property. This makes no sense. If your investor is providing 100% of the money they should hold 100% of the ownership. Why should they buy you some percent of a house right off the bat, or even a percent ownership in an LLC. You put nothing in. This could be construed as a gift with all the associated tax considerations. Better see a CPA.
Your partner should buy and own the house outright, Terry, and presumably fund the rehab. You would have a partnership agreement with him or his entity. He is taking 100% of the risk, but since you are going to do all the work a 50/50 split is traditional here, though you can cut any deal you want. I can't imagine offering less than the 60/40 split you noted. As Cal C. suggested, 20% would be preposterous.
If you don't or cannot do what you say, your partner can let you go for maybe a finder's fee, as defined in your partnership agreement. He then gets to deal with a busted flip. I can't tell you how many of these we've seen, and I imagine this prospect might not be as appealing once he realizes the risks he is really taking.
Alternately, you can accept some of the risk by taking a loan from your friend, buying the property in your name or entity, along with the rehab funds. He would then become your private/hard money lender and make a return from the interest and even points. To minimize your monthly costs, these could even be deferred until you sell.
You would keep all the profit, which would be substantially more then from a partnership if your loan terms were typical of an HML. Much cleaner, but less profitable for him and probably not as appealing. (Alternately, you could also share some of the profits. Look up a shared appreciation mortgage.)
Nothing is free or without risk, Terry.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Jeff S. perfect response and spot on... our money we take title.
- Property Manager · Palm Beach Gardens, FL · Member since 2015 · 111 posts · 27 votes10y
FA-Financial Advisor
"technically holding a note"
Thats if the private investor and sometimes considered a partner is not giving 100% of the loan or money to flip and acquire property. If the partner or private lender is lending out 100% of the money I don't think they will want just 20% or hold a note, I would hope they get full owner ship. I apologize if I was not clear on my post.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Jean Taveras thanks I always miss that one.. I guess since I have never used one I don't think of them... good FA is critical for many folks.. as long as they are not selling you their product they get paid to sell and are truly independent. many insurance folks are FA and they just sell insurance products that may or may not be that great of deal.
- Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes10y
IMO, it just comes down to the cost of money. You can pay a HML whatever % for a finite amount of time. For example, after the home is rehabbed and rented you shouldn't have much trouble moving it over to bank financing. On the other hand the partner takes whatever % for eternity. That's expensive money.
Don't get me wrong, I actually think partnerships, when done well, are fantastic. I purchase all of my rentals with a partner. I just think the partner needs to bring more than just cash to the table. My partner and I are both intimately involved in the business. We have similar life goals we are working towards, we have been through some rough times together. Great partnerships are fantastic, and hard to come by.
Don't partner because you see a big pile of easy money. That is a disceptive pile of cash and comes with a very high cost.
- Real Estate Professional · Chicago, IL · Member since 2015 · 120 posts · 22 votes10yId say it's case by case. You have to looks at each deal independently. Maybe you bite the bullet and start the relationship with the investor. If you do a good job, maybe you can negotiate more favorable terms or get him to fiancé lance two projects simultaneously next go around. Maybe you find a project that works well for the hard money guy start that one while finding one that the investor would like to be a part of. Either way, you have options.
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