This question is for the professional home Flippers out there in BP land. If any of you wouldn't mind sharing some details, I would greatly appreciate it!
I'm starting a Flipping company with my cousin. We will be the general partners, and we've approached our family, close friends and co workers as investors. Maybe one or two of these people are accredited investors. I do have a meeting schedule with an attorney, I'd like to be prepared with some knowledge before I waste my money and his time.
1.)Is this a legal practice that we can do? I remember an early podcast where a police officer/Firefighter opened an investment trust, is this still a viable option?
2.)How are these deals generally structured? All of the investors will be bringing in different amounts. We're looking to build a fund of 300-400,000 for our first house flip. (Northern NJ - that's 1, maybe 2 houses). Is it beneficial to make this a 2-3 year investment, or should we base it on per house? I've seen that returns are usually 8-12% for private investors.
3.) On top of the monetary investment I will be making, what do you add on top of the deal for managment fees, etc.?
Thanks for reading and/or replying. Any additional information would be great too!
If you are talking about syndication, you are also going to have to account for any SEC issues, and getting set up for that. You mentioned accredited investors, and you are right. There is a whole process for qualifying people, taking funds, where the funds can be held, who can access them, etc.
Glad to hear you are going to an attorney. This will cost you thousands of $$ to set up to do it right.
@Eric Costa it would be my opinion to take the money on a property as needed. If you need 250k for an flip, maybe 200 as a first from one person then 50k as a second from another. Syndication when you are just beginning doesn’t make much sense as the complications will bog you down. Even after 4 years and 30+ flips we still do it the same way. We currently have over 2 mil invested but each dollar is tied to a deed of trust and promissory note on a particular property. This keeps the investors money safe and them happy
@Eric Costa , funny, that podcast sounds really familiar. Podcast #3 perhaps? LOL
What you are describing is pretty much what I did. But it wasn’t for my first flip...I’d done a couple dozen by that point.
What you should do depends on your access to investors and your deal flow. It would be a flop not a flip if you go through the trouble of forming a company and raising money (and paying for the associated costs of doing so) and then you can’t find a deal, or discover that you don’t like the business, or whatever.
A simpler approach is to use hard money or private money loans to finance the bulk of the project cost (typically 65%-75%), and get one of your money friends to put up the rest (or you put it up, if you can). Using this approach you can prove out your plan and build a track record without a lot of setup cost. It goes deal-by-deal and your money partner can have an active role so that they are a partner rather than a passive investor (check with your counsel—if done right this avoids the securities issue).
Once you’ve established a track record and deal flow, you might then consider forming a fund where you raise a pool to invest in multiple deals, funded by passive investors. This will be a securities offering which requires the assistance of securities counsel.
The structure I used originally was a simple 50/50 split of the profits, but there are endless variations. You could offer the investors a higher split and charge acquisition and disposition fees, or a lower split plus a preferred return...there are an endless number of combinations but I recommend that you keep it as simple and transparent as possible. What the economics look like is mostly influenced by supply and demand. If you have a ton of investors wanting to invest with you, you’ll be able to keep a larger portion of the profits than you would if you were struggling to find enough investors to fund the venture. I did a five year term and flipped dozens of houses before the investment timed out. After that, I did it again, raising even more money, and flipped hundreds more.
When I was doing flips it was always deal specific and paying out 12-15%. The investor got a 1st position and promissory note. I always did 100% financing. I did not charge fees and my investors did not get any other fees. After I was established I then would obtain loans from banks at 75-80% LTC. This eliminated the need for a lot of private money, but if I did need it, I would put them in 2nd position.
I also did some 60/40 partnerships (60% to me).
I think a syndication is a bit much on your first few deals. In fact I would suggest a hard money lender on your first few deals or use private money, but put at lease 20% of your own money into the deal. The last thing you want to do is loose your friends/families money.
@Brian Burke The man himself! I had to go back and listen to your podcast. It makes plenty of sense what you are saying. I should really get a solid foundation before i start trying to put together fund like that. I'm going to go down the hard money route to begin. Since this post I've contacted a couple HM lenders and we're working out details. Thanks for replying, I appreciate the insight. It helped push me in the right direction.
@Todd Dexheimer Thanks for the reply. After some consideration, I believe I'll be following the same path you did. I didn't realize all the complications involved in starting a fund like that. So to begin, I'll do doing a Hard money loan, and i'll use a partner/my own funds for the required down payments.
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