How to structure financing

Question

How do you approach financing for a Fix & Flip with multiple investors? For example, as the manager do you offer investors a fixed percentage (basically a loan) or do you offer equity in the deal? I know in California there are limits to personal loans (10%) so that limits the attraction for investors.

Andrew Postell · Answer

@Ron Henderson whenever we are lending to people we know usually those people are leaning on our expertise on structuring it and what interest rate to provide.  So, I get what you are asking here but there's another important question - what kind of rates can you get on your own?  Meaning, if a HML will lend you at 10%...then you want to pay less than that or it's not worth it for you either!  I would certainly get prequalified with a "fix and flip" lender first, get what types of terms they are offering you, and then go to your friends about getting a lower rate from them.

And yes, I would highly encourage you to use any private financing as a lien.  You pay them their interest rate, and you do not give up your profit.  They don't get to be a partner just by lending you money.

Keep in mind, this is not a discussion about making sure you don't overpay on the property, how to file your liens properly, or analyzing numbers....this is just how do I know what rate to borrow at.  You still need to be knowledgeable about the other things too.

Hope that makes sense how I am describing it.

Peter Mckernan · Answer

If you are brand new and just trying to get deals, the deals you want to be doing are any and all deals that make sense. So, if you are doing deals and need to give equity and interest rate that is high you should do that as long as the deal makes sense!

When you start to do more deals and get better at what you are doing I would only be doing an interest rate that is solid and points that make the deal good for you. When you are doing a lot of deals and are seasoned it is hard to give away equity if the deals/flipping is your full time business.

Michael Hernandez · Answer

Ron, there are two common ways people handle this. Some set it up like a simple loan where investors get a set return when the project sells. Others bring investors in as partners who share in the profit. Loans are easier to manage but may not always be as exciting to investors. Equity can attract people since they get a piece of the upside, but it also means more paperwork and sharing decisions. The best choice depends on how much control you want to keep and what type of return your investors are looking for.

Drago Stanimirovic · Answer

Ron, you’re spot on about California’s 10% usury cap, unless you use a licensed lender, debt-based investor returns are limited.

Equity structures (like profit splits or preferred returns) are more flexible, let investors share in upside, and are common when pooling funds. Just be sure to handle legal compliance, especially if it’s a syndication.

For a simple setup, use debt via a licensed lender. For scale and investor alignment, equity is the better route.  Happy to explore further if needed.

Ron Henderson · Answer

I think "preferred return" is the answer I was looking for. For example, I would like to invest $100,000 in the project with a preferred return of 12% per annum. If the project completes in 6 months, I would receive ($100,000) x 0.12 x (6/12) = $6000.

This does not violate the usury cap because a preferred return is not interest on a loan, but a share of the profits from an equity investment. I risk the loss of capital in exchange for a higher return.

How to structure financing

Most Popular Reply