what percentage of the profits fo I get?

9 Replies

Im new in this and was wondering what I should get out of a flip profit. 

 Here is the scenario. 

I work with an investor/realter in one. He finances the house and the rehab material. I put in the labor. I find the house. And I rehab with my own labor. 

Im also paying taxes and holding costs/ utilities. 

I know there might not be a exact answer but can we get close? 

Im in the processes of learning with this investor/realter

being mentored and set up to do these flips on my own. 

 Thank you!

Welcome to the site, @Victor Panasyuk  

This sounds like the usual money partner/rehabber arrangement.  You do all the work, he provides all the money.  The typical split is 50/50.  The money you're spending on holding costs and utilities is an expense, so you get reimbursed for those before computing profit.  Taxes typically come out at the two closings on a flip.  Usually property taxes are paid in arrears.  So, you pay taxes for 2014 in the spring of 2015 or the end of 2014.  When you buy, you get a credit from the seller for the partial year taxes and then when you sell you have to give the buyer a larger credit for the larger partial year.  That includes the credit your received from original seller, so your net tax payment is for the time you owned it. 

I assume the investor/realtor would get their commissions on the purchase and then sales of the house.  Those would also be expenses, not part of his profit.

You should  be sure you have this decided and written down before you start on the deal.

Jon Holdman, Flying Phoenix LLC

If your partner is just contributing the financing costs and you're doing everything else, you two could also consider structuring it as a loan, where the partner becomes the lender on the deal. In this scenario, the loan and interest become an expense to you, but you keep all the upside in the deal. From your partner's perspective, this might be considered beneficial because he would get more of a fixed return on his investment (the loan interest, points, etc.) rather than wondering what his half of the eventual profit would be.

What type of profit margin (%) do you typically net after all expenses, sales costs, etc.?

thank you so much! That helps a lot.

 I haven't made any deals yet. But a few deals Im looking at look to be about 13%

 But struggling to find something that I can be confident in. 

Also im looking at a house that is made in  1926 and renovated pretty recently. Arv value at about 110000. Is it possible to jump it higher 30% by upgrading anyway. Or do houses not sell to a certain margin being that old and being small in size?

@ Jon Goldman 

    What really sticks out to me is that you said he dosnt get the commissions on purchase or sale... even if he is the realter?  How and why does it work this way.   I've taken the time to make sure all of our deal is on paper thanks to your advice. Haha, thats something I would fail in. 

Thanks again you for your time!!

Victor, on a flip, you should be looking at buying at 70% less repairs.  A 13% profit margin wont yield you much of a profit, certainly not split two ways.  If you are looking at 13% and not having interest or labor costs, you are doing something wrong.  This goes double if this is your first deal, I can guarantee you'll have cost overruns and stuff pop up you didn't think about. If you want to back door me a deal you're getting serious about, I'll take a look at it, I don't work Lawrenceville, but know most Atlanta markets.  

I generally buy with a 30% margin and net out 12-14% after all costs (RE commish, holding costs, etc.)  You can cheat a little on your number if you dont have RE commissions or money costs, but 13% still doesn't leave you much room for error.  Its hard to tell how off you are, depends a lot on what you've got factored in to get to 13%.

To answer your original question, as Jon said, 50/50 is typical on this kinda thing.  I'd be concerned about the plan being you doing all the work yourself, though.  Depending on how much work you've got to do, only having 1-2 guys on site takes forever.  

As far as the RE commission, my inclination is he is providing the money, you are providing the labor for a 50/50 split.  If he is also selling the property, there is additional consideration.  You're only talking 2-3% there, anyway, the other agent gets money, as does the broker.  To be honest, though, it sounds like y'all's deal isnt that clear cut, so it will wind up being whatever you guys come up with...just know the more you get on paper before you start, the better everything will go.

Victor,

Welcome!  I'm in Gwinnett county as well. 

Most of the advice here is "on point."  I think the 50/50 split is a good start.  Keep in mind that if the home is listed, then a Realtor would make 2 to 3% and if he sells the home then a good question is he going to charge you a commission?  To me (also a realtor/investor) the commission is in the deal on a 50/50 deal.  That means when we retail it out I'm not taking a commission, I'm splitting the profits.  On the buy side I may get a commission but that goes into "the pot."

In terms of evaluating a deal, I really hate "BP" posts that suggest there is a formula. If you're only making 10% on a deal but the deal itself is lower risk or have other intangibles that you might want then it's not a bad deal. What I do agree with is setting up minimums so you have boundaries. It could be 20K profit and 10% Gross ROI or 20% etc.

In Gwinnett and more desirable areas the margins are smaller but so is the overall rehab challenge, it's also easier to retail the property vs Atlanta where you might have more rehab challenge, etc.    Risk vs Reward.  Would take 10% all day long if the deal is easy. 

@Jon Holdman  an earlier post tried to bring you back to this topic ...

@Victor Panasyuk you asked:

What really sticks out to me is that you said he dosnt get the commissions on purchase or sale... even if he is the realter? How and why does it work this way. 

What I wrote was:

I assume the investor/realtor would get their commissions on the purchase and then sales of the house. Those would also be expenses, not part of his profit.

So, I am assuming that, as the listing agent, the investor/realtor would get their usual commission the sale.  If he also acted as the buyer's agent on the purchase, he would get a cut of that commission, too.  Both of those are expenses of the deal and get subtracted out before calculating the net profit.  The investor/agent on this deal would earn his share of the net profit plus the commissions.

I would recommend that because if this investor wasn't an agent you would still be paying the commission on the sale and it would go to some other person.

Jon Holdman, Flying Phoenix LLC

In my experience the % is 50:50 as others have said.  You said that you find the houses.  Most realtors will write up the deal for 1% or you can use an attorney.  Either way it is an expense (of the deal) to be subtracted even if the one % goes to your partner.  If you use the partner to sell the house (he is entitled to 3%).  In my case, both my wife and partner's wife were realtors.  The commissions were not counted as expenses but that is different than your situation.

We even used an adjustment to the 50:50 split depending on the amount of money required and the amount of rehab required.

Bill