Profit split in a SFR flip as only a money investor

18 Replies

I am considering investing with a friend who actively flips single family homes. He states that he would look for a minimum of $20,000 investment in order to take on a partner. As I am new to the industry and working with him as a partner, I’m looking to come in low at $20k-25k. He is a part time realtor and has all of the connections (contractors, lender, etc.) and would organize the execution of the flip. I’m very handy and am offering to chip in wherever needed to reduce contractor costs alongside him.

What type of profit split would you consider fair in this scenario? (50/50, 30/70, 15/85 etc.).

I’m assuming this is contingent on price of properties. Have not looked into available deals for purchase, but homes in our target market that were recently flipped tend to sell in the $250-300k range.

Before starting to browse this community, I assumed it’d be a ratio of my portion of the purchase price ie. 20k/150k= 13% Since that would be proportional to my share of the cash liability on the flip investment. However, after reading more about how you can flip properties with little to no money down through other borrowing avenues my potential partner may have very little cash tied up in the flip himself. Does that mean I am in a position for a larger percentage?

If I am way off base please tell me. Just figured it was a question worth asking now so I’m not kicking myself when I find out I left money on the table later.

This sounds like it could be a good opportunity for you. IMO a simple split that you guys agree on would work best instead of trying to calculate a ratio of what your share should be. 

Are you paying cash or using hard money to financing these flips? If you provide ALL of the capital and he finds the deals/handles the execution of the flip, then 50/50 can be reasonable. But if he is doing all of the work and also providing a lot of the capital then obviously he deserves a higher split.

It sounds like you are going to be hands off. When I invest as the money partner, I do it locally and am never "just" the money partner. I stay in the loop, visiting the property frequently and getting very frequent accounting. If you don't you will get the short end of the stick. (which might be still fine with you)

Not being in the loop means they can adjust the accounting to make the net profit whatever they want it to be. They can mix the purchase orders between jobs. They can do all kinds of things. They can easily turn a 50K profit into what looks like a 30K profit with just a pencil, or a couple of mouse clicks.

I discovered (after the fact) that one guy had a deal with his HVAC guy to overcharge labor by a third on his projects with investors. And do it free on his jobs with no investors. I have seen 5 gallon buckets of trim paint purchased when my project only needed 1 gallon. Stuff like that can add up.

@Colton Fairchild thanks for the reply, you’ve got me thinking this thru a lot more. I’m anticipating he would use a traditional mortgage to purchase the house. Assuming this and a purchase price around $200k, that means he’d probably have to come in with cash as well (since my 20k wouldn’t even cover the full 20% down payment). Let’s say he matches my 20k to get the down payment of 40k and then he pulls a home equity loan to cover the rehab expenses. ( ignoring other fees to keep math easy)

On cash alone, it’s already 50/50 but since he’s putting his name to the loans ( taking on liability albeit not to the same degree as hard cash) and is also leading the project execution he’d have a more than fair argument to expect a majority of the profit. Maybe 60/40 or 70/30 etc.

I guess I’m just trying to figure out how much each type of contribution (money, knowledge, hustle, etc. ) is weighted so I can gauge my fair “chunk of the pie”.

The over arching takeaway I’m getting is that there is in fact potential for closer to a 50/50 split when acting more so as just a cash investor (depending on what else the other investor is committing to the project).

The profit split ratio you seek is contingent on how much of the "money" you actually are. As in, is your $25,000 covering the down payment for the first lien financing of the flip and also the rehab portion? If that is the case, then you are the "gap lender" and should be getting 30-50% of the net proceeds. Or is your money just being used as the debt service of whatever loan he is getting, so he has skin in the game himself? That could be more like a 10-15% return. Or are you just the rehab money? Maybe 20-25% net profit to you then. Whatever you are, even more than what you're making, you want to secure your lien appropriately. Create a note, record a DOT, get the appropriate title insurance and make sure you are listed as a loss payee on the hazard insurance. And if your money is being used for the rehab portion, then you should be doling it out in draws, most likely as reimbursements for money he personally spent first.

@Eric M. made some great points too. Dreaming of your profit splits is cool and all, but making sure you protect your money at all costs is way cooler. These types of small JV deals can go awry very quickly if you're not careful. 

Market rate for completely hands off, no energy in the deal private money is about 8%-12%. 

If you are willing to riskier and assume some of the upside or downside, then you could restructure and get creative. 

But if all you're doing is lending and trusting, the aforementioned range is what I see.




@Eric M. thanks for the reply. I do plan to be more hands on actually. Since I’m looking to learn and potentially use this as a stepping stone into my own flips. So I intend to make visits to the site and be clued in on decisions and costs. I also mentioned getting my own hands dirty on the rehab if it can reduce contractor costs and increase profit.

I definitely appreciate the warning though. I don’t anticipate any shady dealings, but it’s better to be paying attention to everything rather than blindly trusting.

@Aaron Pfeffer this is great info! I appreciate you outlining multiple scenarios. I will most definitely be working with a real estate lawyer to draft a contract for this partnership or to vet the contract my partner provides. I’ll be writing down the items you mentioned to ask when vetting lawyers to work with. Thanks again.


@Ryan Rogala

As a added suggestion , with that capital amount, you may want to consider investing with a real estate flip company or a fund that will give you diversification rather then one property. You would probably get a very decent rate of return with a lot less involvement and risk. 

Best of luck in all your endeavors.  

With $20-25k, you could do a project yourself locally using OPM, hard money or other financing. Do you want to be a passive investor or do you want to learn how to do this business?  If you want to be passive, then the split to me on most real estate investment partnerships may depend on the following:

Who found the property?

Who is getting/holding the financing and signing as guarantor? 

Who is managing the project?

Who is handling the financials/bookkeeping?

What % of the total investment you are putting in?

Every deal or partnership could be slightly different, and depending on the agreement the split could vary greatly.  Is this a one time deal or intended to be more than that?  I would highly suggest some sort of partnership or investment agreement that spells out exactly who does what and what that means in term of shared profit.

If you want to learn this business, then that is an entirely different situation and you could arrange a coaching/mentorship agreement with him for the first few deals to teach you how to do the business and that is obviously worth something on his end.   Just some food for thought. Best of luck! 

@Michael Krupp thanks for the info. Definitely some food for thought. I haven’t gone any further in discussion with him yet than simply his minimum $$ requirement for a partner. Looks like step one is asking myself how much involvement I truly have the stomach for both now and in the future. Then step two is sitting with him to see what he is looking for from a partner and negotiating a common ground from there.

Everyone provided some great feedback and structures.  

Make sure you get an attorney to draft up all the agreements regarding partnership structure and security instrument for your cash investment.

Originally posted by @Ryan Rogala :

@Michael Krupp thanks for the info. Definitely some food for thought. I haven’t gone any further in discussion with him yet than simply his minimum $$ requirement for a partner. Looks like step one is asking myself how much involvement I truly have the stomach for both now and in the future. Then step two is sitting with him to see what he is looking for from a partner and negotiating a common ground from there.

From what you have mentioned here above, I think you found your answer. Ask the partner what he would offer you for your $25k, make a decision on how much involvement you want, and decide how much it is worth to you both for you to learn on site with this project. Make your final decision based on the answers to those questions.

 

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