Partner wants 32% ROI. Am I crazy to consider?

Question

I am considering bringing in a partner (that I've known and consider a business colleague for over 14 years). He has a ton of integrity, but he is requesting 32% ROI on a $60K investment ($79K total). This is a flip property I am hoping to purchase at auction for $320K and ARV $575K with a 4-6 month timeline purchase to close. I am also using hard money for the cash purchase and rehab. My total exposure on the property is under $5K. Iv'e crunched the numbers and right now, if we win the bid at the $320K, we should net $79K easily on the property, $19K going to him and $60K going to me. It's in a hot real estate area that I'm very familiar with. Net-net, this is the first time, I've considered a partner. I do need one on this property as I'm leveraged in 2 other properties right now. Am I crazy?

Jay Hinrichs · Answer

smokin deal for you.. why even ask.. if you don't have the money to do the deal 100% of nothing is NOTHING.

here you make 60k the investor makes 19k which for this situation is about right or on the low side given their risk

I see so many on BP worry about what their investors make then never do any deals.. because the peanut galler hopes on here and says your crazy.. but you can be crazy to the tune of 60k all the way to the bank.

Will Barnard · Answer

I want 32% too!

In all seriousness, how you structure this deal with your "partner" will determine if this is a good deal for you and him or not. Take into consideration how you will hold title, how profits and or losses will be split, who does what and when, etc. You likely need an entity and a solid operating agreement or at minimum, both of you on title with a solid joint venture agreement, in either case, you need an attorney to draft you some docs here to make this work.

Is it worth paying out $19k to get you $60k with only a $5k investment from your pocket? Hell yes, but again, the devil is in the details so don't miss any details, partnerships can ruin friendships.

Odie Ayaga · Answer

Just to be sure on your wording...

To me "asking for a 32% ROI" I would never do because that sounds like guaranteeing a return on an equity investment. If it's a debt investment and he wants 32% on his money no matter the profit that's different, that would be your decision. If he's looking for 32% of the profit if there is any then I'm with @Jay Hinrichs.

Christopher Villa · Answer

That's what I thought :). I am fairly new at this, just needed some reassurance. Thanks @JayHinrichs! Happy holidays to your family!

Heather Turney · Answer

@Christopher Villa I stumbled upon this older thread and am curious to see how the deal worked out for you (or didn't) so I can learn from your experiences. Thanks for the feedback!

Christopher Villa · Answer

@DavidAbbate. My goal is to return his money first before any profits are realized. I also plan to put some $$ in as well during rehab, so it's a shared responsibility. But, overall, my goal is to protect his money even if I have to take a hit. All in all there's risk for both of us and I can't guarantee that either of us make $$ or lose it. I also would never enter into an agreement where I guarantee that he gets his $$ back. All I can do is calculate the risk and do my due diligence up front, so we mitigate the chances either of us lose $$.

Eric M. · Answer

I am curious how you calculate your "exposure" to be 5k.

Jay Hinrichs · Answer

If your going to be hunting courthouse steps in the bigger counties in the Pac Nor West you will need to follow at least 25 to 50 properties to buy one.. maybe not 50 but certainly at least 25..

Christopher Villa · Answer

Thanks @WillBarnard! I'm thinking about engaging my attorney to fine-tune the agreement. Unfortunately, this particular property postponed at auction, but we will be looking at different props to set up the same agreement.

Christopher Villa · Answer

Thanks @OdieAyaga! I think I'm going to structure this is a waterfall agreement. All reimbursements, closing costs, holding cost, expenses, renovations, financing all taken care of prior to any profits being distributed (if any). Once these are all taken care of, his 32% is being based on a 6 month close (purchase, reno, list, close). If we achieve faster, it gets reduced 5% a month down to 17% at 3 months. In other words, if it's not profitable, neither of us get anything. If it is and after all expenses are paid, he gets 2nd position after financing. For example, if there is a $12,000 net profit, he would get the first $10,200 (17%) of that and I would get $1,800. We think the meat is close to $60-79K on the net, so even at 32% ($19,200), I still stand to make $40K if all goes well. And, that's the key, eh? It has to go well!

Partner wants 32% ROI. Am I crazy to consider?

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