Hi all. Wanted some input if anyone has any ideas here. We flip houses in multiple markets with mid sized volume (67 closings so far this year and around 50 houses in inventory). We are in the beginning stages of raising outside capital (we are using only our own money + hard money loans for now) and are trying to determine how to cost our fixed overhead costs in terms of LP fund profit.
We have a decent amount of HQ overhead (operations manager, transaction coordinators, admin assistants, office rent, travel expenses, etc), plus each market/field has another $20k or so of monthly overhead -- sales, project manager, superintendent, admin, office costs, etc.
The three options we have come up with are:
1. each employee keeps time on the amount of time spent on each house and we bill this to each house, like a law firm would work (this is hard and time consuming)
2. we pass through all of the overhead to the fund directly, like the fund is investing in a company. The con to this is that it is hard to have different deal structures with different LPs
3. we try to come up with some arm's length costs for doing the actual work -- e.g., cost + % for the GC work, acquisition fee, selling commission fee, etc. These costs would be charged against the house before profit split.
Option #3 is how it is usually done with 'traditional' real estate private equity funds where you can easily arm's length property management fees since there are obvious standard rates when you only own a few assets, etc.
Does anyone have any experience with how to allocate and split these operational costs in a medium sized flip fund ($30-50M of equity)?
Our investor rates are going to be 8% pref, 60/40 split in LP investors' favor.
Why not get all your overheads in one year then divide it to any/all properties, have a pre-set high rate to charge per property and adjust it at end of year. ie if your overhead last year was 10% charge 12% per property then if it goes 8% LP gets the 4% additional at year end. But this means that the LP relationship needs to be at a minimum 1 year. I usually dump all my OH like a regular project and dump everything there then split them at year end to get my p&l.
That’s not a bad idea. Appreciate the thought.
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