Fair Return to Investor for Financing House Flip

[Andrew Rascoll]

Hi BP Community,

I am new to REI and currently have 1 STR.

A friend of mine started flipping houses a couple years ago with 2 friends of his through a company they started (which, after speaking with him got me interested in pursuing REI as well).

I am thinking of investing money with them to get some passive income and learn something along the way about that area of REI. While I will be reviewing their past financials and history of payment back to investors before making a commitment, I was wondering what the usual payout structure is in these scenarios, as well as the fair return I can expect.

His company has a minimum I find high, that I can disclose through DM. They promise 10% annualized return monthly starting from when they call on the money, to when they flip the house.  Is that fair/in line with industry standards?

Also, from a tax legal standpoint, I am wondering if it matters that the investment comes from me individually or through my LLC. And best way to handle the repayment of investment and capital gains from the sale - from a tax implication standpoint.

Thanks a lot!

[Chad Shultz]

Andrew,

Sounds like you could have a good potential passive income stream available, but make sure to do your homework. It sounds like you plan to. Many markets are starting to slow, so past performance may not repeat going forward. I find, in my area, most hard money comes with points as well as interest. Most also has a minimum use period, so the investor is guaranteed to make at least a certain amount for their money. In your case, 10% may be good, if you are not financing a whole deal. I would say if you are just giving them $10k or $20k toward a larger project, you should expect a different return than a single lender funding an entire deal. There is a lot more information that should be taken into account before anyone says whether or not it is a "fair deal". Additionally, what might be fair in your eyes and fair in my eyes, can certainly be different. I can tell you there are US Treasury I-Bonds available right now, which are paying 9.62% and that money is federally guaranteed, so no risk to consider. Now, I am not an attorney or accountant, so I cannot give you legal advice, but there are many variables as to what benefits you may get, depending on how the money comes back to you. I would suggest you speak with a financial professional for the best approach. If you are a single-member LLC, it likely won't matter how you take payment as the IRS does not recognize single member LLCs anyway. However, I believe the payments would be counted as income, rather than capital gains when you are talking about interest on a loan. I probably wasn't much help, but might have given you something else to think about while you are evaluating the possibilities.