How do investors get paid?

Question

If I wanted to be a flipper, and I wanted to use an investor's money to buy property, what is a typical structure of that agreement? I once partnered with a friend, we split the cost of the purchase 50/50, we contributed 50/50 for rehab costs, we share the work of managing the rental and we split the profits 50/50. That was easy to structure but I had to give up half of the profit. But if I wanted to use a friend's money, and that friend didn't get involved in the transaction details, the rehab, and all of the work, would I simply treat that person like a bank and pay them some interest? Is there a how-to book that explains this? Do I have to create a note? How do I get started?

Will Barnard · Answer

There are probably hundreds of how to books but nothing beats real life knowledge and live advice you can get right here.

First option which is the best option in my opinion is to keep 100% of the ownership and equity, keep the investor in a lender position, secured with a note and deed of trust which pays investor set interest rate (I typically pay 10%-12%) and you keep all profits.

Option 2 would be to give an equity share where lender gets paid interest plus has some % of the equity. Unless they are putting up most to all of the money, that % should be well below 50%.

Yes, you need a note created and a deed of trust (both of which easy to do buy any attorney and often, the lender has their own). When at all possible, keep the investor as the bank. You can structure with monthly payments or with lump sum balloon payment at the end.

Sam M. · Answer

Good night. Thanks.

Bill Gulley · Answer

I was going to say many investors get paid on hope and a prayor, but I see your question was more involved.

Will outlined it well, just don't let a note lender be allowed profits too, that profit sharing is another animal and is a partnersip arrangement, keep a lender as a lender. That doesn't mean someone could not make a loan to a partnership. Keep it simple as Will mentioned.

Do some searching here about hard money lenders, private lenders and financing. Good luck!

And, good night!