San Antonio, TX · Member since 2013 · 65 posts · 13 votes
Basically, they have seen me work really hard to come up with money for my own deals, when I first began doing flipping, I would ask them to join in and we would share the profits, because I needed lots of money, but they weren't too interested. Now, that I have enough money to do only smaller deals in rough areas by myself, they have come up to me wanting a slice of the cake.
My question is... How big a slice would be fair enough, in exchange for their funding of let's say 50% of an investment property?
I just want to set up a structure with a certain percentage depending on how much funding I get from them.Thanks everyone I really appreciate you guy's help..
If they already want in, there's no need to incentivize them, right?
The basic flipping/rehab math is this: cost of house + cost of improvements + profit margin = sales price. Some people will argue this or that, but basically, that's it. You know the cost if the house, and you probably know for what you could sell it for post-rehab, so the difference between the two is the materials and labor to fix it up, and also profit margin.
Since it sounds like your friends only want to fund, and not put any sweat into the deals, I would consider a flat rate for them, so to speak, like 25% of the profit (and you keep 75%). An arrangement likes this also means you're protected a bit if the project doesn't go as well as expected, since if you make less, they do to, and you're not beholden to a certain fixed interest rate or percentage of ARV or whatever. You'll have to get your own number depending on your circumstances, but the basic idea is to make sure YOU get most of the profit, since you're doing ALL of the work.
If they already want in, there's no need to incentivize them, right?
The basic flipping/rehab math is this: cost of house + cost of improvements + profit margin = sales price. Some people will argue this or that, but basically, that's it. You know the cost if the house, and you probably know for what you could sell it for post-rehab, so the difference between the two is the materials and labor to fix it up, and also profit margin.
Since it sounds like your friends only want to fund, and not put any sweat into the deals, I would consider a flat rate for them, so to speak, like 25% of the profit (and you keep 75%). An arrangement likes this also means you're protected a bit if the project doesn't go as well as expected, since if you make less, they do to, and you're not beholden to a certain fixed interest rate or percentage of ARV or whatever. You'll have to get your own number depending on your circumstances, but the basic idea is to make sure YOU get most of the profit, since you're doing ALL of the work.
I would start off educating them about how private lenders can make 10-12%. If they don't want that, offer up to 15%. Where can you put your money and reasonably expect anything close to that?
If they are dead set on an equity share, go 50/50 but make sure you factor in compensation for your time/effort/project management before you split the "profit." Make sure they understand that up front.
Giving up 50% of the potential profit should be an extreme last resort decision if you have no alternative. You should factor in your time and efforts to locate the property, your overhead to run your business, etc.as you contemplate what to offer the investor. Your challenge is to make your potential investors understand this then you can negotiate a more favorable split like 75/25 as Leon suggests.
If they already want in, there's no need to incentivize them, right?
The basic flipping/rehab math is this: cost of house + cost of improvements + profit margin = sales price. Some people will argue this or that, but basically, that's it. You know the cost if the house, and you probably know for what you could sell it for post-rehab, so the difference between the two is the materials and labor to fix it up, and also profit margin.
Since it sounds like your friends only want to fund, and not put any sweat into the deals, I would consider a flat rate for them, so to speak, like 25% of the profit (and you keep 75%). An arrangement likes this also means you're protected a bit if the project doesn't go as well as expected, since if you make less, they do to, and you're not beholden to a certain fixed interest rate or percentage of ARV or whatever. You'll have to get your own number depending on your circumstances, but the basic idea is to make sure YOU get most of the profit, since you're doing ALL of the work.
I really like that 25/75 profit, maybe even a 20%, since it is very time consuming and not easy at all. I have spent quite a bit of time getting contracts ready, getting quotes on the rehab, meeting with agents, etc... I really had no idea of how much time every flip absorbs from my life and family in general. thanks.
Giving up 50% of the potential profit should be an extreme last resort decision if you have no alternative. You should factor in your time and efforts to locate the property, your overhead to run your business, etc.as you contemplate what to offer the investor. Your challenge is to make your potential investors understand this then you can negotiate a more favorable split like 75/25 as Leon suggests.
50% is deffinitely NOT going to happen, specially since I can fund my own deals with my own cash ( on lower end properties of course), now I just need to make a spreadsheet.
I would start off educating them about how private lenders can make 10-12%. If they don't want that, offer up to 15%. Where can you put your money and reasonably expect anything close to that?
If they are dead set on an equity share, go 50/50 but make sure you factor in compensation for your time/effort/project management before you split the "profit." Make sure they understand that up front.
are you talking about an hourly compensation for my time/effort/project management?? or more like a set fee per house??? please elaborate if you would, thanks.
Providers of funds will be in a position where they get a certain % of the funds provided or they will be in a position to get a certain % of the profits. Private lenders usually get 10% to 15% per annum for their funds. If you have a project that takes 6 months and your profit is 20% per project you will pay them 5% to 7.5% and you will keep the remainder. They will receive their money whether you make a profit or not. Assuming you make your budgeted profit and the project comes in on time you are able to keep 62.5 to 75% of the profit.
If the private lender is going to take a % of the profits he will want a larger cut than this because of the risk.
I have been on both ends of these transactions. If I am getting a % of profits I usually take a preferred payment(about 10% of funds provided) + 50% of the
remaining profit. This is steep and not many borrow from me. That is OK with me.
@Ricardo G. use whichever method you are more comfortable with defending as reasonable compensation for your contribution to the deal. It is normal for a project manager to receive 10% of the rehab project cost as a rate of pay. In any case, it's all negotiable.
You could do one deal at unfavorable, but still profitable terms to show your funder how easy you will make it for him to make money with you. But tell him that's what you are doing, so you let them know what to expect. Once you show them how you deliver results, you will expect better terms for future deals. That way, you don't play hardball and turn them off. Just don't "give away the farm."