I currently live in London and have some money in the U.S. I'll need to buy a personal residence and cars when I return in July 2016. My question is should I loan this to a business partner who wants to complete a flip?
I would put in the terms that it was due back in 9 months and have had good experience lending on a flip with this person before. Is it worth the risk of something going wrong and not getting paid back in time? It sure would beat the bank interest rate if I just leave the money in my savings account. Anything else I could do to safeguard myself?
A regular flip should take just a few months. Should be able to do 2 to 3 flips in that time if they have experience.
Definitely friend or not you need a professional agreement drawn up by an attorney. These things sound great going in but when something goes bad that is when the upfront agreement is worth it's weight in gold.
It really makes me uneasy when I hear investors say "I need." The first question you need to answer is a personal one, define "need". If for some reason the deal doesn't sell until September of 2016, will you still be able to eat, breath, and sleep safely. If you cant then you shouldnt. If you can but there are a few arrangements thats need then sure.
But NEVER invest with "need" money PERIOD, because then you blur the line between investing and gambling. I flip houses I dont gamble.
"Safegaurd" -your only safeguard is through due diligence.
I would only fund a deal with a rehab time line less then 45 days and avg DOM less then 30. like @Joel Owens said that should be no problem. I can typically do 4-5 flips with the same funds in a year.
There are to many variables in investing that will not allow someone to guarantee that you will have your funds on a particular day. Shortening the period of the funding terms will just increase the chances of default, it will not guarantee that you will have your money back by that date. By shortening the funding period is more of a precursor to limit the project time line of the flipper; if i get funding at 6 months I only look at deals I can be in and out of rehab in 45-90 days (including permitting), less then 30 days Avg DOM, and 45 days to close. If I had 12 months I would look at new construction/addition/ small development, with 6 month rehab less then 30 days Avg DOM, and 45 days to close.
When I partner with my private lenders I ask them for a calendar year plan, If they have a big move planned like yours, a big event like a wedding or retirement, birthdays and/or anniversaries. Not to deny them of a partnership but to align their funds with a deal that suits their needs. Theres a deal out there for everyone, you just have to be honest with yourself and aware of your needs, abilities, and your limitations.
I think it depends on several factors. You advised that you have worked with them in the past, how long did it take them to flip a home in the past? I agree with Joel, an experienced flipper can do a deal in 3 months tops. If for some reason it is taking longer I would find out why. When I list a property I go all out and get it sold within 30 days on average. Flyer the neighborhood, door knock, postlets, craigslist, open house, etc.
Also, I think it depends on your risk tolerance. I have a high risk tolerance so I would say yes do it (unless the guy doing the flip usually takes longer than a year to flip a house then absolutely not). I personally try to do several deals before buying “do-dads” including my personal residence that won’t produce income.
IMHO, no, you should not do with with cash you need at a specific time. I've had such loans default and it took six months after the default to dispose of the property. If you're in that position and cannot wait to get the cash, you'll end up leaving some of that money on the table to get back what you can by your deadline.
Jon Holdman, Flying Phoenix LLC
Thanks for all the input. @Joel Owens I would have a legal note drawn up for sure.
@Delon Hall Good point on the need money. I could live without it, would just have to figure a few things out.
@John Hyatt The first flip took 5 months as my partner did all the work, almost a full gut job, after working his full time job. The house turned out amazing in the end.
I think I'll see what deals he comes up with and consider loaning some of the money I have if it's a great deal, keeping a reserve so I'm not in trouble if things get delayed.
I would target a 6 month time frame. Definitely look for smaller/easier deals rather than the maximum profit. One advantage of 6 months is that it allows a renewal if that option makes the most sense.
In addition to lower risk deals, I would try to keep your LTV as low as possible. That will make it easier for the borrower to cash you out if necessary.
While you can get better terms with cash, the actually cash requirements for a car and a place to live are not that high. A couple successful deals might buy you a cheap car, and renting and figuring out the area is always an option.
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