Advise on how to determine the percentage of profit

2 Replies

This is my first post on Bigger Pockets.   A friend of mine, who has done few flips, and I have had some preliminary discussions on helping him with funding of his next flip.  

I am thinking that what I am expecting as return on my investment would be at the very least to get my money back and a percentage of the profits from the sale.  I am struggling to come up with a formula or approach that would determine what percentage of the profit would make sense and would be fair to both of us.  My initial thought was that the percentage should represent the ratio of how much I am contributing to the down payment.  Also note that on these deals I am doing nothing other than contributing cash, no search, no management, no marketing, etc.  Appreciate any and all advise.  Thanks.

@Michael V Akbar - What do you really want and are comfortable getting? Do you like a more set rate of return or are you ok with unpredictability and a bit more risk? Also, do you want to get paid every month or are you ok waiting till a project completes?

You could lend him your money for a point or two upfront then charge 6-12%. You could make him pay you monthly interest only payments. Or you could go the route of charging a higher rate, but not require him to do monthly interest only payments, and just have all the interest paid out at the end when the principal is returned. 

Another option is do a partnership route. He finds and manages the deal, you provide the capital. I have done several deals like this where we did a 50/50 split of the profits.

A lot depends on what each person is looking for and what they are comfortable with. In the end, you don't want to take too much as he could find cheaper money.

Andrew Thank you for your reply.  I am willing to to take a little bit more risk than just lending him and as you suggested go the partnership route and get a split of profits.  Just wasn't sure if I can always ask for 50-50 split or if that ratio is driven by some other factors.  Thank you again for your input.

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