Entrepreneur · Duluth, GA · Member since 2015 · 68 posts · 5 votes
I am purchasing a house for $200k and I need to bring in a financial partner to pay about $25k in rehab costs. I expect to generate a profit of about $40k. What percent of the profits should I share with my investment partner?
@Bobby Holley, it needs to be better than they are getting from leaving it where they have it, and also to make it worth their time and trouble pulling it out. But, it shouldn't need to be anywhere near the 50% of the profit ($20k) that you will be expecting to generate. I would suggest not more than 20% ($5k), because you are only working on a gross ~17% profit on the deal in the first place. Cheers...
@Brent CoombsYour reply is moving in the direction I had hoped. To your suggestion of 20% wouldn't that percentage = $8k? Or, did you calculate a 20% cash on cash return which would = the $5k figure you gave?
@J Scott I would prefer doing a loan with a partner because I think I can get the house sold in a couple months which would clear more cash for me and it hedges the investor's bet. I just wonder if an investor would be content with their return or would they want more.
How are you buying the property? If it's cash you could use a HELOC to fund the rehab.
I think it also depends on your experiance level, if the loan will be unsecured and how long you expect til the money is paid back. If I were the lender, I would think 3-6k would be plenty depending on the factors I mentioned
@Brent CoombsYour reply is moving in the direction I had hoped. To your suggestion of 20% wouldn't that percentage = $8k? Or, did you calculate a 20% cash on cash return which would = the $5k figure you gave?
Yes, the latter (not more than 20% of their loan of $25k). If you can get them to agree to your $4.5k, you have good reason. But if they push for higher, THEY might have good reason too ie. What will you do otherwise?
Of course, you do know that you might get better Rate from a HML? Are you confident your Lender won't need to send out their enforcers later?...
@Jeremy S. Today I am meeting with the seller to suggest we enter an equitable title contract requiring me to meet certain requirements, including the rehab costs ($25k) prior to the sale of the property at which time the seller receives the $200k purchase price. I receive the appreciated rise in value.
Although I have been approved for an 80% LTV from a portfolio lender I can't meet the 20% down payment ($40k) required. So, rather than pursue a financial partner or hard money lender for approximately $65k I want to negotiate with the seller to forego the direct purchase arrangement we have discussed and proceed with an equitable title contract. This way I can find a financial partner for the rehab costs only.
@Brent Coombs I'm very confident we can sell the house in a couple months but you never know. The looser my financial connection to Tony and Bobo at the HML the easier I will sleep. Plus, I want to open up a perpetual pool of investment capital for future projects without paying exorbitant rates.
You are going all the work and coordination = 25% of the deal.
The total down on the house is $0 if I read this correctly.
The current owner gets the first 200k of the sale price down the road.
You'll need to come up with 25k to get your contract, which is all coming from the financial partner. I'd give them the next 20k of the deal.
Finally split the rest of with the financial partner 75/25 (partner/you for work and coordination). This should net them about 10k on a 25k lend. Not bad as long as it sells in 12 months or less.
Brief:
$0 down
Show 25k in bank
~256k selling price
~16k to Realtor
First 200k to current owner
Next 20k to financial partner
Split ~20k in 15k for financial partner and 5k for you
@Aaron Montague, you would love to be the financial partner in that scenario, wouldn't you? But I don't see why @Bobby Holley should settle for just $5k on the deal merely because he was clever enough to have minimal dollars into it.
If I had $25k lying around only earning bank Interest Rates (or even if I could borrow it at conventional Interest Rate), I might be persuaded to lend it to a friend that I trusted for $5k interest over $3 months! Hopefully, that's the sort of partner that Bobby has in mind.
@Aaron Montague According to the way @Brent Coombs views the deal the financial investor would make an 80% cash on cash return for their money. Not too shabby, I think.
@Bobby Holley We pay different rates for different amounts but generally on a 25K loan, we would pay 7.25% on a secured basis but 9.25% if it was unsecured. Our rates can go as high as 15.00% for amount over $$500,000. Just be fair in your approach to offering rates as you need to make sure you can pay it and you need to make sure you make money on any investor based deal.
@Aaron Montague According to the way @Brent Coombs views the deal the financial investor would make an 80% cash on cash return for their money. Not too shabby, I think.
It looks to me like Aaron is proposing a 140% CoC return to the financial partner (loan = $25k; return = $35k) in just two months! Good luck, Aaron!...
That is a good point. The critical piece here is the timing.
3 months isn't overly realistic for buying, fixing and selling a SFH. Most banks are taking 45 days to close mortgages. So from the purchase date, @Bobby Holley would have 45 days to fix everything AND get an offer to hit the 3 month window.
So yes, over 3 months making 5K on a 25k lend would be great. It's roughly the same as 10k on a 6 month lend. This all assumes the house sells for the $256k number discussed above. Yes, the APY on this deal is 80%, but this assumes you have enough of these deals to use the investor's money year long.
Rethinking this I'd probably structure this line:
Split ~20k in 15k for financial partner and 5k for you
to
Split ~20k in 10k for financial partner and 10k for you
@Bobby Holley Why can't you just get financing with a 90/10 loan with a lender that also pays up to 100% of the rehab costs. I got this great fix and flip loan that's also experience and asset driven.
@Aaron Montague The nice feature of an equitable title in this deal is that I won't have to buy (and thus close) the property from the seller which cuts out a significant amount of time. Once the seller agrees to the equitable title contract I can begin rehabbing the seller's property in pursuit of a future sale of the house.
That is a good point. The critical piece here is the timing.
3 months isn't overly realistic for buying, fixing and selling a SFH. Most banks are taking 45 days to close mortgages. So from the purchase date, @Bobby Holley would have 45 days to fix everything AND get an offer to hit the 3 month window.
So yes, over 3 months making 5K on a 25k lend would be great. It's roughly the same as 10k on a 6 month lend. This all assumes the house sells for the $256k number discussed above. Yes, the APY on this deal is 80%, but this assumes you have enough of these deals to use the investor's money year long.
Rethinking this I'd probably structure this line:
Split ~20k in 15k for financial partner and 5k for you
to
Split ~20k in 10k for financial partner and 10k for you
These numbers are insane! Making 80% for doing no work? He would be better off wholesaling the deal then to pay that price or go in with someone as a 50/50 partner. Hey Aaron... if you ever need money and that is the type of deal YOU are willing to structure LET ME KNOW!!! I know some Russians that will lend me money cheaper than that and I'll keep the spread lol.
To the original post - find a realistic partner under the terms that the others posted here or get a hard money lender for a year at 15% or less... it will be way cheaper than what Aaron is proposing. I have an EXPENSIVE hard money deal at 15% on $85k and it only costs me $1k per month. You can find those deals all day long.
Now as much fun as you folks are having crapping all over my numbers, I'd like you to bear a few things in mind.
1. This is a 25k loan.
2. The total predicted profit is 40k.
3. We are not 100% sure the place will sell for $256k
4. We are talking about 1 deal, not 4.
5. The timeline is not guaranteed to be 3 months (or less)
Outlined scenario:
Purchase 200k
Sell 256k
16k to realtor
30k to investor in 3 months - 80% APR
10k to
Proposed Options:
Wholesale - If he can wholesale this deal for 10k go for it, but given the complications, I doubt it. Always take 10k today rather than do any work. Not sure which set of rehabbers is going to go for this deal.
50/50 split with finance partner - On a 40k profit, the finance partner loses 5k in this deal
Hard Money - If you can find one willing to lend 25k at 15% and no points, this is a better deal. If there are hard money folks lending 25k at 15% and no points, 3 month term, please PM me!
Math Realities:
This deal isn't part of a package of deals. So the return on the deal is only 80% if everything works out exactly right at the above scenario. Unfortunately there isn't a second deal to put the money in, so the 5k return only amounts to a 20% return for the deal. APY doesn't figure into this.
If the purchase price is off by 5k (251k) the finance partner only makes $3985 on this deal.
Conclusion:
The deal is too thin to not pay out big time looking yields on this. It only takes a 10k shift in final sale price to all but eliminate the profit for the financial partner in this deal ($620 profit). I'm not sure I'd borrow Russian money on this one with enough confidence that I'd have it back in time to pay them off.
Does the bank holding the mortgage have to approve the equitable title?
Good question. I don't have the answer to that, yet. I'm speaking soon with the real estate investor who originally proposed the equitable title concept to me. I will ask him then.