Financing a deal with other Investors

7 Replies

Hi Folks, 

I'm new to Bigger Pockets and new to Real Estate investing. I wanted to see if anyone here has experience with financing a real estate deal and then earning a return after the property sells? If so, what has your experience been and what would you recomend for people doing this sort of investment for their first time? 

I am interested in this as well. I'm looking into doing this next year. I imagine if they pay you, you'll pay them interest only with a bonus at the refinance or sale.

@Rosston Smith 

What if you've never met the person? Financing a deal without knowing someone is difficult for me. How do others get past that? 

@James MacKinnon

"financing a real estate deal and then earning a return after the property sells"

Do you mean financing someone else's flip? This happens all the time.... Usually through a private lending platform as an intermediary, i.e. a company that takes your money and lends it to people who apply to them for financing. Some even allow you to pick the project. But as with all RE transactions and all loan transactions, you are taking a risk with the person and with the project. I guess it all comes down to how much you trust the lending platform to vet applicants adequately to minimize your risk.

@Patsy Waldron

Thank you for chiming in. This is for a flip project and I would be financing it myself. I'm new to real estate investing but I'm eager to get my feet wet. I also believe it'll will build momentum if I can get this deal and move on and make 20% ROI. I meet with them this weekend to take a look at the property and see if this is something I want to really be involved in. Is this something you've been involved in before? What steps have you taken? Did you get any documents signed and notarized?

Gotcha. If I understand you correctly, someone approached you (online, it sounds like) and presented you with a joint venture deal where you put up the money and they do the work? I have heard of this being done quite a bit... Especially if the one financing has zero experience or interest in doing the rehab work, or want to get into REI, like yourself. It can be an excellent way to learn about real estate if you find the right partner. Pay close attention when you meet this person. What does your gut tell you?

The most important thing you want to do is vet the potential partner VERY thoroughly. You especially want to make sure the numbers they present are accurate- too often, rehab costs are under-estimated and ARVs are over-estimated by inexperienced (o r dishonest) rehabbers. Double-check their numbers with other experiences rehabbers, maybe even here on BP.  Ask them for examples of flips they have done before, as well as references. Any information you can get that will set your mind at ease about your money being in good hands!

You will want a contract that spells everything out in detail. Have this drawn up by a lawyer. You will want to specify the division of rights and responsibilities in the partnership (e.g. Will you just provide the money and then wait for your payday, or will you take a more active role in the rehab like participating in design decisions?), the division of profit, what happens if there are cost overruns or things don't get done in the agreed-upon timeframe (do you provide more money, or does your partner take the hit?), etc. You want to make sure you, and your money, are protected. If you are financing, the property should be in your name (or your LLC, if you choose that route).

These are a few things that come to mind. Hopefully others will chime in. Real estate is exciting and there are many ways to get in and be successful. Best of luck!

@Patsy Waldron

This is exactly what's happening but more on the financing the repairs/remodeling of the house not the complete project. How do funds get protected in that aspect? 

Do you mean the partner has already bought the house and the title is in their name, and you would only be financing rehab costs?

Draw up a financing agreement that specifies how much money you are putting up, how long you are financing (you don't want your money to be tied up for years!), and what you will get at the sale of the house. Since you didn't finance the purchase of the house itself, it is likely that the partner will offer to pay you principal + interest rather than a share of the profit (at least that's what I would do). You'd draw up a promissory note for the amount you are putting up and specify the interest rate and time frame.

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