How to structure a Flipping partnership with a passive investor

8 Replies

Hi all,

A friend of mine, who is a successful business owner, wants to partner with me to flip houses. Since I have flipping experience and am very active in RE investing, he will be a passive investor. I am not sure how to structure this partnership and wanted to get your opinion. Should he bring all of the capital? should I have a skin in the game? what percentage of the proceeds should each of us receive etc...

Thanks!

Doron

Doron, if he is going to be 100% hands off then in my opinion this should be structured as 50/50 partnership. Yes, his money is @ the mercy of your experience however without a partner who has "skin in the game" his investment would be far riskier than going the safer route through you.

Traditional structure for larger deals like this is preferred return to investor, something in the 7-10% range and 70/30 investor/sponsor split on liquidation.

Originally posted by @Ken Jernigan :

Traditional structure for larger deals like this is preferred return to investor, something in the 7-10% range and 70/30 investor/sponsor split on liquidation.

Could you elaborate on this structure @Ken Jernigan. The investor (my friend) will get 7-10% return and 70% of the proceeds?

This is how larger investment partnerships are put together. The sponsor (you) puts up little or no money and your friend all of it. He has no say in the business and you control all decisions. He gets the preferred return up to the agreed percentage first, and thereafter all cash is split 70% him and 30% you. This applies to liquidity events such as a sale or cash out re fi. You can see this structure on crowdstreet.com an active platform for accredited investors, mostly multi-family.

So you get 30% of the deal for finding, managing and selling a construction project. And none of your own money at risk. You're free to negotiate your best deal, but I would treat investors, especially friends fairly.

This structure mostly applies to all equity deals. If you're looking for institutional debt (bank or non-bank lender) they're likely to require you to put some of your own money in, and you both to personally guarantee the loan. You can PM me if you want some more detail on all this.

BTW--I lived in Westfield NJ for 10 years or so, and had friends in Ridgewood. Liked Westfield a lot but don't miss the winter, or commute to NYC.

Originally posted by @Doron Rice :
Originally posted by @Ken Jernigan:

Traditional structure for larger deals like this is preferred return to investor, something in the 7-10% range and 70/30 investor/sponsor split on liquidation.

Could you elaborate on this structure @Ken Jernigan. The investor (my friend) will get 7-10% return and 70% of the proceeds?

 This structure is typical in the larger format space like apartment deals, etc. For a single family flip, I personally would not do all the work involved in finding, managing and selling the deal for just 30%. That of course is just my opinion. That said, the 50%/50% version is also common but does need to fit both parties. 

The real question is, what price points are you working in, how much is the expected profit after all costs (acquisition, rehab, holding, resale) and of thatbprofit, what amount are you comfortable with based on the assumption of having zero dollars in the deal?  Answer that and you know what tomoffer your potential partner. What we all think is irrelevant.

Doing all the work for 30% of the profit is not a good deal for you is not advisable. Considering there is plenty of money out there at this time you shouldn't need to go below a 50/50 split. If you are experienced then I don't see why you should even give-up that much. Go to a bank or HML, both scenarios will likely be cheaper for you. If you want to establish a partnership with this private lender and are willing to give a little more to create the relationship that is understandable but remember that what you give now will be expected again in the future.

Originally posted by @Will Barnard :
Originally posted by @Doron Rice:
Originally posted by @Ken Jernigan:

Traditional structure for larger deals like this is preferred return to investor, something in the 7-10% range and 70/30 investor/sponsor split on liquidation.

Could you elaborate on this structure @Ken Jernigan. The investor (my friend) will get 7-10% return and 70% of the proceeds?

 This structure is typical in the larger format space like apartment deals, etc. For a single family flip, I personally would not do all the work involved in finding, managing and selling the deal for just 30%. That of course is just my opinion. That said, the 50%/50% version is also common but does need to fit both parties. 

The real question is, what price points are you working in, how much is the expected profit after all costs (acquisition, rehab, holding, resale) and of thatbprofit, what amount are you comfortable with based on the assumption of having zero dollars in the deal?  Answer that and you know what tomoffer your potential partner. What we all think is irrelevant.

Thanks for your input @Will Barnard. Yes, 30/70 looks like a not that attractive deal for me... 50/50 sounds better. will you also give the 7%-10% return to the investor, above the 50/50 profit split?  The properties I'm flipping are around the $100K in purchase, around $70K in rehab and usually sold for $235K,  around $220K after closing cost. so I usually have $50K in profit.

Originally posted by @Doron Rice :
Originally posted by @Will Barnard:
Originally posted by @Doron Rice:
Originally posted by @Ken Jernigan:

Traditional structure for larger deals like this is preferred return to investor, something in the 7-10% range and 70/30 investor/sponsor split on liquidation.

Could you elaborate on this structure @Ken Jernigan. The investor (my friend) will get 7-10% return and 70% of the proceeds?

 This structure is typical in the larger format space like apartment deals, etc. For a single family flip, I personally would not do all the work involved in finding, managing and selling the deal for just 30%. That of course is just my opinion. That said, the 50%/50% version is also common but does need to fit both parties. 

The real question is, what price points are you working in, how much is the expected profit after all costs (acquisition, rehab, holding, resale) and of thatbprofit, what amount are you comfortable with based on the assumption of having zero dollars in the deal?  Answer that and you know what tomoffer your potential partner. What we all think is irrelevant.

Thanks for your input @Will Barnard. Yes, 30/70 looks like a not that attractive deal for me... 50/50 sounds better. will you also give the 7%-10% return to the investor, above the 50/50 profit split?  The properties I'm flipping are around the $100K in purchase, around $70K in rehab and usually sold for $235K,  around $220K after closing cost. so I usually have $50K in profit.

 Sounds like you have very reasonable numbers and profit at completion so in my opinion, 50% straight with no additional should do your partner just fine. If not, you can borrow funds on a note and deed of trust for less cost than 1/2 your profit so go that route if your partner is not agreeable to a straight 50/50 deal. Just my opinion and not to be taken as a hard line or financial advice.

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