I am looking at a potential flip project where the purchase price is $40,000-50,000 funded by a private investor and a rehab of about $70,000 funded by my company who will also be doing the work and managing the project. The construction company (us) will be doing this at cost with no profit till the end. What would be a fair split of the net profit. Looking at $170,000 ARV. Thanks for any input.
Hey @Josh VanSetten , there are two pretty common ways to do this:
- You do the work at cost and split the profits evenly (or however you and the partner deem fit)
- You build profit into the deal and that's your take. You and the partner can work up a performance bonus or something to incentivize the right things if you end up going this route.
Either one can work, depending on what you and the partner are most comfortable with.
You're doing $70,000 in renovations "at cost"?
Based on your numbers, there's only $50,000 for potential profit. Your renovations will cost $70,000 but that's at cost with no markup, no profit, and probably not even paying yourself. Labor is typically 30 - 35 percent of the total cost, so your renovation costs are probably closer to $100,000 or more. That leaves potential for $20,000 in profit if you don't run over on costs and the property sells for what you anticipate.
Am I wrong? You should pay your company like you would any other company, then see what's left on the bone at the time of sale.
The construction company has to be kept separate from the investment company. The investment company hires the construction company at normal costs to do the project. This sounds like an equity deal, the Construction company puts in 70k capital contribution (more if profit included) and investor puts 40-50k into investment company. I would structure the split on ratio of capital contributed.
I agree with @Nathan G. This deal seems tight. Have you factored in builders risk insurance, closing costs, realtor fees, price increases (lumber up 180% in the last 14 months), etc?
Labor is figured into those numbers. Probably about 35,000 in labor costs.
Great feedback thank you! I will definitely do a double check of my numbers and make sure I am not missing anything.
Thank you all for the input. The private investor and I came to an agreement on terms that are more on the line of what you all were thinking. It happened a little late because this house went under contract before we got our ducks in a row. That's ok, we now have terms set that will allow us to move more quickly on the next one. Now I have to get to work and find a deal.