I'm in contact on a rehab deal and I'm contemplating if I should go with hard money or rather with an equity partner.
The basics of the deal is
100k purchase price.
This should be aprox 45k profit before cost of capital.
If I have an 50/50 equity partner I would be giving away around 22.5k. If I go with hard money and wait 6 months to sell the property it will cost around 12k (this is based on 3 points, plus 12 apr which is high). If it takes up to a year it will be around 20k.
Based on the #s it looks like hard money is the better option but I'd love to hear from folks with experience what else should go into this decision.
@Moshe Eisenberg, it essentially is a risk/reward tradeoff. Yes, if all goes according to plan, you will make more money taking out a loan and retaining 100 equity stake. However, you are taking on more risk. If the deal goes south, then your lender is going to recoup his/her money before you see any of your investment back. If a deal goes south in a 50/50 equity partnership, you both take equal hits on your investment. If you have both options available to you, then you are going to have to weigh these pros/cons.
With that being said, I prefer to use a private loan on my rehabs (I have never used official "hard money") if I have both options available to me. If you're confident the deal is going to make money, no reason to give equity away if you have other options.
Of course, its on case by case basis, but In general, if the profit margin is thin(80% in my area), an equity partner is better, you share the risks, and cost of the money is relatively low on thin margin. Everyone makes more money than taking on the hard money. In fact, you will lose money operating on that kind of margin with hard money.
When you have a good margin(65% - 70%), then equity partner becomes expensive if they bring nothing else on the table. You better off getting a hard money in that case.
If you feel very confident on your ability to return your projected numbers and keep rehab budget/timeline and ARV in check, then I think hard money is the way to go based on just the numbers.
If you're not so certain about hitting your target and your equity partner (understands these risks and) is comfortable with the deal based on the upside, then personally I would go this route and avoid a possible tough situation with hard money lender.
One key part of this is how much money that you have to put in to this deal.
@Steve Olafson I put in around 10% of the total cost either way. With hard money they have this requirement and with an equity partner I like to have some skin in the game so the money partner feels more secure.
Most hard money is only going to go up to 80% of the money that needs to be put in. JV, while more expensive, usually requires less down. Not all people doing a JV are going to put all their money down. They may borrow to do the deal as well.
JV should be less money out of your pocket is why I made the statement that it depends on how much you have to put down.
This is the only question that you have to ask yourself: Do you want to tie your own money up, or do you want to leverage someone else's money and use your own for your own purposes?
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