Hard Money + Equity Partner

[Zach Whitt]

The plan is to flip a property using an equity partner to provide the cash reserves and a hard money lender for the bulk of the purchase and rehab.

We originally planned on all cash, in which case we would split gains/losses 50/50. Money partner would provide all the capital, and I would do all of the work (not the actual flipping work, we will use contractors).

Now, he's decided against using all cash and would instead like to contribute $50k to the deal and finance the rest with debt. How should this be split? My thought is that the $50 should be used as cash reserves. But will the equity still be split 50/50? I would think more like 30% to the equity partner and 70% to me. Is that off base?

Thanks!

[Mike G.]

My thought would be he would get 50% of the profit from the percentage of the investment that his $50k buys. So let's say the total costs are $150k. He would then get 50% of 1/3 of the profit, because he is covering 1/3 of the total cost. If you gave him, as you suggest, 50% of the total profit, and the other lender 50% of the total profit, you would end up with 0. Even if you give the other lender a fixed percentage (such as a hard money lender), you would still be getting a raw deal. In my opinion, if he wants a profit split, it has to be proportional to his investment.