How much equity should a GC sponsor receive in a fix & flip deal?

Question

Hi all! Long term lurker, first time poster! I know this question has been bounced around a few times, but many of the answers are different or an "it depends", so I'll explain our scenario.

My family and I run a GC and we're doing our own fix & flips. We want to bring on investors (primarly equity partners) to help us scale and lock-in more projects. We source, analyze & negotiate the deal, manage the deal, and perform rehab at cost (including in-house architect and interior design work). We've grown a solid pipeline of off-market properties coming into us, as well as relationships with HMLs and local agents. Basically we are the sponsor and manager for the entire deal lifecycle.....but we need other people's cash :)

In this scenario if we were to not put up any cash but get a deal with all investor money, what should our sweat equity percentage be vs the investors? I've seen answers ranging from 10% (which seems crazy low) up to 50% (which seems insane). We want to take care of our investors and ensure they continue to invest in our projects, but we also need to make sure it makes sense for the work we put it.

Thanks in advance for all your help and advice.

Chris Seveney · Answer

Not a simple question because what if there's cost over runs that were your fault or probably doesn't sell. The way to structure this is you are a general contractor and have a contract to perform specific task on the property. You have another entity that is the owner of the property that may take on an investor. What you were asking is the investor to front all the money and you act as a general contractor. If I hire a general contractor, I don't give them equity. I pay them. So this is why this is challenging, typically in these instances when you're also the operator, typically you may get 10 to 20% of the profit after giving a preferred return to the investor

this is why you are better off getting a loan and getting 80-90% financing and they include 100% renovation costs

Peter Mckernan · Answer

There is such a wide array of answers on this topic and partnership with GCs and investors. It's that bad answer, it depends. It depends on the deal, the investors experience, what you/your family are doing on the deal, and so much more.

For example, what if one deal you get needs a three week turn around for rehab because it is such a light rehab, and you are typically 60% you and 50% investor, shouldn't the investor get a better cut? Or what if the investor finds the deal and you make double what you normally do on flip because it is a great deal? This is a deal per deal and investor per investor situation. The JV docs have to be fluid.

Royce Running · Answer

Hi Peter, thank you for your response. I guess I wasn't clear enough in my question...the investors do NOTHING but provide capital. They dont bring deals, they don't provide input, they are a silent equity partner.

I'm a Financial Advisor so I guess I'm looking at this from the lens of the institutional investments that I use for my client's portfolios. An investor in Real Estate ABC Fund simply performs due diligence on the fund sponsor and invests based on that. They dont get a say in which property the fund buys or how they re-develop the properties. They invest and get a return on their investment - simple.

I disagree that the JV docs need to be fluid. Investors prefer certainty when investing, as do we when analyzing a deal. We have certain parameters a property must meet (time horizon, rehab costs, % of borrowing, gross profit, etc.), or it doesn't happen. So why would we want to change our percentage on every deal? If we want a higher percentage then we would invest our own cash to increase our ownership. But again, in this singular instance, I'm only asking what a "normal" sweat equity percentage would be if we find a deal which we use all investor cash for? I'm leaning toward a structure like an 8% preferred investor return and then a 70/30 or 60/40 split.

Royce Running · Answer

Thanks for the insight Chris. We are leaning towards doing something that's a preferred investor return and then a split on remaining profits, like you mentioned.

The issues with hiring a GC with fixed costs and financing 90% of the deal is 1) significantly eats into profits, and 2) if a GC is not invested in the deal then they don't care if they go over costs or stick to their budget. Having us as GC and equity partner puts us on the same side of the table as investors, so we can make adjsutments on the fly when we see something that will affect the outcome (profits).

How much equity should a GC sponsor receive in a fix & flip deal?

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