Structuring a Fix & Flip Deal

7 Replies

Hi, I am a newbie investor and my partner and I are trying to begin with a flip of a SFR. Since this would be our first deal and we don't want to use our minimal savings , I was wondering what anyone's thoughts are on financing a Flip this way:

Find a hard money lender to fund the project cost (purchase price + rehab cost) and find an equity partner to fund the holding cost payments (interest to hard money lender, property tax, insurance, etc.) and offer him/her 20% of the profit. 

This way, hard money lender gets his 8-12% interest regardless and the equity partner would only have to pay $1-5K in holding costs for the 3-4 month rehab period and assuming we make a $30K profit, that's $6K for the partner (potential of 100% +cash on cash return). 

Let me know your thoughts! Thanks! 

@Lakshmi Nikitha Duggirala Congrats on taking on your first deal! You're on the right track with the idea of leveraging others capital to gap fund the difference of what a hard money lender will require to do a deal. This is how I took on a few of my first flips as well. However, there are some things to consider in today's market.

You'll want to prepare to bring 10-25% of total project costs as a form of down payment (on top of monthly holding costs) to do a deal - especially if it's your first. Most lenders will finance 80-90% of purchase price and 100% of rehab funds up to about 65-75% of resale value.

For example, If a deal is $150,000 with purchase price and rehab, expect to bring $15-$30k to do the deal assuming the loan value does not exceed 70-75% of resale value. Any amount above that % will be required out of pocket by the borrower. In essence, prepare your private equity partner to bring more skin in the game if necessary to do these deals.

@Eric Loya Those guidelines were super helpful! When you structured a deal this way, did your money lender every have issues with you bringing on an equity partner as well? How did you structure your deal (how much equity did you give your partner)? 

@Lakshmi Nikitha Duggirala you are thinking about it the right way. I think if you can get the equity investor to take 20%, that should be a good deal for you. Some investors want equity, some want a set return w/ contract. 

Offer the 20% of net profits or a set 10% return (within the assumed 6 month flip period) and see which they prefer. 

Onward!

sjw

@Lakshmi Nikitha Duggirala The lender I used at the time did not mind the strategy, however each lender has different parameters in how they approach an equity partner (some want the lender on loan docs, others may not care as much). You'll have to call around to find the lender with the structure your most comfortable pursuing.

My equity split was 50/50 since I didn't bring cash into the deal, was brand new at investing, and had no established credit (20 yrs old at that time). 

Whatever you can work out with your equity partner is completely your call.

@Shawn Ward Apologies if this is a dumb question. What do you mean by 10% return? What would you be guaranteeing in the contract that way? 

@Eric Loya It's amazing that you worked out such a deal when you were 20! How did you go about finding this equity partner and any tips on negotiating tactics and how to form such a contract (did you hire a lawyer for this)?

@Lakshmi Nikitha Duggirala you offer them 10% ROI...thus 10% interest on their loan to you. If they invest $100k, you pay them $110k when the house is sold.

Join the Largest Real Estate Investing Community

Basic membership is free, forever.