How to structure a flip with other investors

1 Reply

I visited a SFH this weekend that I think would make a good flip (still doing my diligence to ensure). Assuming that all works out though, I know I can’t swing the funds for a down payment, rehab costs, etc. myself with other things going on. I happen to mention the deal and lack of funds in passing this evening to friends and two individuals I know said they would be interested in investing. Both essentially ended the short conversation with “let me know what you’re thinking.” I’m unclear how much either party could bring to the table, but they are both individuals who wouldn’t go into REI on their own. But while I have experience rehabbing, renting properties and dealing with contractors (so I have that going), I have zero experience with having other investors onboard (clearly something they didn’t realize). So I don’t miss a good opportunity, and understanding that an agreement could be written an infinite number of ways, can anyone provide any advice on how to structure an agreement? Some basic frameworks to model for a starting place? What I should be looking to do? Mistakes I should be sure to avoid? Thanks!

Avoid other cooks in the kitchen and make it clear you are the operator/developer of the deal with all decision making power.  Get your conventional or private or hard money rehab loan financing in place, and then secure your friends' debt in second position behind that.  You are essentially using their money as "Gap Financing" to cover whatever it is you lack -- down payment, debt service for the rehab loan, extra cushion for rehab itself, etcetera.  Offer your friends a fair return for their money, which should most likely be pref interest + profit participation.  Those amounts are up to you, and the "pref" should be deferred, so it will also be paid when you sell the project, just like the profit participation portion. 

To reiterate...strongly suggest not bringing them on as "partners" with any decision making power. You will be tempted to form an LLC or other entity (perhaps a trust), and include them in the paperwork. Don't. This can work well for larger Multi Family syndicates in need of Limited Partnership status, but should be avoided for SFH flip venture. SFH flips are relatively simple, so do your best to keep it that way and keep all the control while also offering your friends a fair percentage of the profits.

And in case you are wondering why "pref interest?" It's because they are lending you money, and if this deal doesn't generate the windfall you expect, well at least they get a minimum pref that shouldn't change, which they deserve as risk taking lenders on your project. 

Good luck!

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.