Please respond with your opinion if this is a favorable partnership?
I pay for the marketing to find and lock up the deal. We use my partner's money to buy the property. We use his money to finish the rehab. I manage the closing, rehab project, accounting and sale of the property. We split the profits 50-50.
Alternatively, I may want to suggest the split to 40% me, 40% cash partner, 20% contractor to drive down costs and keep the contractors focused on the bottom line. What do you all think? Calling private lenders, rehabbers, flippers, etc.
I wouldn't do that deal if it were my money. You have nothing to lose if the deal goes bad.
Unless it is a very small project, what you are providing is not worth 50 percent of the profit. Your money partner could hire it done for less.
The risk/reward is not equitable in a deal like this unless the partner providing the cash just wants to help someone get started. Clearly, you are trying to generate cash. I would either save until you have the cash to do a deal your self or drop the split to something like 80/20 which is getting pretty close to just wholesaling. I know first hand the difficulty in generating cash to invest but hang in there you 'll make it. Good luck.
That plan outlined is definitely favorable for you @James Ibis if that's what you're asking.
It's a fantastic deal for you to invest zero dollars and potentially make tens of thousands of dollars, if not more.
It's not a deal I would recommend for the partner investing 100% of the money.
I've never been part of such a deal, but if I was investing 100% of the money, I'd want at least 70-75% of the profits.
This depends completely on your level of experience and the trust/relationship with the financier. If you are new to rehabbing, as I am assuming you are, then the split favors you to much. As you gain experience then the split can and should move in your direction.
I am working on flip number 5 and 6 (not counting mobiles) and my split with the investor is 60/40 my favor. These are also the first 2 flips he has financed for me 100%. The amount of time to locate, purchase, and manage a rehab is significant and takes education and experience. Those should be rewarded when you have acquired those skills. Also the cost of direct mail and other marketing must also be considered.
Best thing to do is find a local mentor and save up some money. After you have a some knowledge from your mentor then take your cash and partner with someone with a split based on the amount of cash invested but also experience.
Having "no skin in the game" will make that a hard sell. I think you are going to have to offer 75% or bring some cash up front to get a 50/50 split.
You are competing with potential deals where is he probably getting 25% or so of the gross profits and is protected from a high chance of loss due to cash from the buyers. Also if you go over the timeline the increased percentage is less valuable because he could have missed out on 2 safer deals in that time frame.
I am doing a deal like this right now with my partner @Michael Kaufman . I provide the financing/closing/carrying costs, my wife handles finish and staging, Michael is the GC, and we split 50% of profits (with my wife and I counting as 1 part of the partnership). Michael is very knowledgeable in construction. It is working well for us.
As others mentioned, it is a favorable deal for you, but it isn't clear how favorable it is for your partner. It is not necessarily a bad deal for him/her. Marketing is a pretty large investment of time and resources. If you are good at it, that is significant added value. I would also think you would need to work as the GC for this to be more equitable.
You might back off your percentage of the profits a bit until you get a couple under your belt. Instead of bringing in a GC and watering things down further, you might see if you could pay someone to mentor you through your first rehab.
If you aren't finding the deal AND managing the project as GC, then you are essentially a wholesaler.
Do both sides make a profit agreeable to them?
This is only a good deal if you are buying well (preferably at a large discount to market value) and have a rehab plan that is appropriate for your market (you know your resale market well) and you can execute that plan efficiently (preferably come in under budget). If you miss any of these factors you may have a project in which you don't get paid for your time and your partner loses money. If you are a newbie you will need to find a newbie money partner to fund the deal--then good luck.
This is not the type of deal I prefer (I usually fund with a fixed interest rate) but if an experienced rehabber brought me a deal like this and I knew they were purchasing below market value I would consider it. (I would probably still convert it to a note). However, a rehabber who had enough experience that I would consider partnering with in this way would probably want more than 50% of the deal and could probably get it from someone.
I’m considering something similar for myself but in the multi-family buy hold investing.
I would suggest maybe for flipping :
40% yourself versus 60% debt partner investor ( cash / credit person )
or 50% yourself versus 50% debt partner investor ( cash / credit person )
I, like @Jeff Rabinowitz , would prefer to fund at a fixed interest rate - usually as a first/second.
In a partnership as you portray above, I would be require a priority return of my capital - if the there are overruns, prolonged carry and/or the property does not sell in the forecasted prices range, I am made whole first. Since you have no skin in the game, and no bankable track record, I would be looking for 70 - 80% portion of the profit.
@James Ibis- Hi James, we have done several of these types of transactions. But with a few changes. We offer 8% set return on the 1st position note plus profit sharing. We act as the general contractor and handle all aspects of the project from start to finish. We are able to do a 50/50 split with our capital partners, but as a few other community members have pointed out- this is usually dependent upon a certain amount of trust from your financing partners.
Have you considered using hard money lenders? Many of these lenders work within the financing needs you are discussing. Most will lend between 60-70% of ARV, with the loan running from 6 mo to 3 years, no PPP. Just a suggestion.
I've done this deal on both sides. Like Jeff said, it depends a lot on the buy. If you've got a good one and know your stuff, great deal for both. If you buy thin and go over on the rehab , the investor's return goes to crap.
While I agree with the sentiment of the other folks on here, they are RE investors saying they'd rather do the deal than fund it. Johnny 9-5 has no idea how to do what we do and making $10-20k in 6mos is a dream come true. All depends on who you are pitching.
The math usually works better in your favor to borrow instead of partner, btw. I do mine with none of my money. HM on the first, PM second to cover the rest.
I could see doing a deal like this but, what are the properties like. What is your experience and what are a few success stories. Any deal can be done and I admire your 50/50 out of the gate style. Contact me if you want to go further. I am interested.
Each deal is different based on the profit in the deal. We do deals like this all the time and the equity split varies based on a variety of conditions. I will say that if we're only contributing sweat equity (the marketing costs are nothing compared to project costs) than we usually take a 30% position.
We have one deal we're working now between a seller, us, and our contractor. The seller is putting up the property, the contractor is putting up the cash and doing the rehab, and we're managing the whole deal. For this one, we're taking a 20% position, giving the owner a 30% position with a slightly lower property valuation, and the contractor gets 50%.
At the end of the day my advice is this. Sit down with all parties involved, find out what they need to get out of the deal, and find a way to make it work.
Join the Largest Real Estate Investing Community
Basic membership is free, forever.