Private Money Terms Ideas

5 Replies

Hello fellow BP members!

I am making my way through the baby steps of investing in real estate and was looking for some feedback or ideas where I could find information on private money terms. I have a few friends who are interested in investing in Realestate to some degree with me. They are more on the time poor end, and are interested in just providing the cash for the deal. 

Is there a general rule of thumb on what is considered a fair way to split a deal? Say if they come up with the money needed for the down payment and rehab but I took care of all the leg work, would that be something worthy of a 50/50 split or is like a 70/30 - 60/40 more likely to fit that bill? It would be with friends, so I want to make it a fair deal.

Thanks ahead of time for any info, ideas and thoughts,

Clayton

Clayton, What is fair is what all parties agree to.  If you are providing sweat equity and your friends are funding 100% and taking the financial risk, 50/50 with some sort of preferred return on the investment is probably in line.  Just make sure your documents are extremely well drafted and everyone knows exactly what they are getting into.  Doing business with friends is often a good way to lose friends!  Good luck.

@Clayton Hutton As Jeff suggested, a fair deal is what all involved parties consider to be fair. Since these are friends, you could sit down and have an open dialogue about potential ways to structure the deal. If they're providing the financing and you're "swinging the hammer," a 50/50 split might be a perfectly appropriate option.

Something I just thought of reading your comment "they are more on the time poor end, and are interested in just providing the cash for the deal" - be sure this is truly the case. Are you going to have to run potential renovations by them? Will there be push-back on how you decide to exit?

Set the expectations upfront and, as Jeff mentioned above, have them clearly laid out in the docs to minimize the potential for conflict in the future.  

@Clayton Hutton   A simpler way to do it may be to bring your friends on as debt investors and just give them a fixed return for the use of their money (more like a private money lender) instead of making them equity partners and giving them some percentage of the deal.  Just another option.

@Clayton Hutton I think 50/50 is fair but does that include losses if your deal goes south? You can make them debt partners and pay 12% or so or whatever the going hard money rate is for your area. I've done both but there's a big difference. The 50/50 situation is less risky to you than the debt partner scenario. The 50/50 partner has a chance to make a lot more money but stands to lose in case the deal fails.

In the debt partner scenario, the investor is agreeing to a smaller part of the profit but is expecting to get 100% of their investment back plus interest.

I used too much leverage on a fix and flip four years ago and lost a lot of money. I had friends involved in those deals and, technically, I could have just walked away because they were debt partners. Since they were my friends, I eventually paid back every cent I owed. After that experience, I decided I would minimize debt partners or hard money lenders and maximize the amount that came from equity partners to reduce my risk.