The impression that I've gathered, mainly from reading about the BRRR method, but also from other places, is that a hard money lender is used to finance the deal and as soon as a refi is possible you get in bed with the bank and the hard money lender is out of the picture. However, a friend/mentor who is a successful real estate investor talked to me last night about another way to structure a deal. Essentially he takes the deal to the lender and asks for a partnership, ie: "You put up the funds, I'll rehab it and manage it and we'll split it all 50/50". He creates an LLC for each individual property where the terms of the partnership are all laid out and everything is shared: cashflow, costs, and equity. Does anyone else structure deals with hard money lenders this way? Why or why not?
Hard money is expensive but can work depending on how you structure the deal. I wouldn't ever want to give up 50% of my profit but that's me. I've had success in using "private" money which is different but similar to hard money.
If I don't go to my lender and I use my private money connection I ask my lender once it's rehabbed etc. will he loan me on it? 9/10 it's a yes. What he will do is get a "subject to" appraisal done. If the appraisal is good and is around 75% LTV after repairs are made he will give me a commitment letter. I go to my private money guy say I can do the work in say 60 days, my lender will refi it and you'll be paid out by such and such date.
Private money guy provides the cash in a joint LLC I have formed with him. He will give me 100% purchase price and fund some of the rehab or require me to float the rehab. Once it's fixed up, the appraiser comes back out, inspects does a 1004D that all work is completed as plans/specs stated. Close on the loan with my lender, private guy is paid out and no money came out of my pocket except for rehab if I structured it that way.
I wouldn't structure a deal where the property is going to be held jointly by me and someone else. I may partner to fund the project, but at the end of the day, my goal is to be the only one in control once everything is done. A joint partnership can work, but you have to structure the partnership on who pays for what, when and how profits are split, who makes the decisions etc. Having 50/50 control will end up in a broken partnership. Someone has to have control.
If I had to structure a deal where we share cash flow/losses/costs etc. I would do something say a property has $300 net cash flow, I would offer $100 per month regardless to the other person and I keep the additional $200 profit. However, I maintain the property, pay for repairs, market it for rent etc. They hold the debt service in their name solely and structure the deed that both people have rights to the property. That's just my thoughts on that though.
While I haven't used hard money in a very long time, I would never have done the deal as you describe above. Giving up 50% of the profit for financing is very high. In previous flips, I would estimate that 10% - 15% total went to the hard money lender (including points, closing costs, and interest). The lenders that I used to deal with weren't interested in carrying properties, they wanted to get in and out as fast as possible, so their money could be used in other deals. Given the high interest rate, that was my goal as well.
As @Justin Thompson mentioned above, this sounds like this strategy it is more suited for private money, which tend to have more reasonable terms and may hold the property for an extended period of time. Here, I would expect a 50%/50% split (if you are flipping the property together) or a reasonable interest rate (if you are holding the property together).
The 50% thing can work for long term, you give up a lot of profit, but also all the risk doing things that way. That's private money, though, not hard money.
Hard money is collateral lending. You can borrow up to whatever % of the asset with no qualifying at high interest.
Different strategies work for buy and hold than rehabbing. If you do the math on rehabs borrowing is way cheaper unless you are buying real thin.
On long term stuff, credit partners, money partners, etc. work fine, just do the deal analysis and make sure everyone wins.
I think you're all probably right. He likely meant private money, that's what had me a bit puzzled. Like @Darrell Shepherd said, it's a lot less risky and this particular guy definitely likes to play it very safe.
Thanks for the feedback.
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