How to partner up on Fix & Flip

Question

I am a newbie investor and trying to get my feet wet on fix and flips.  I know this investor-A who does fix and flips as his main source of income, and I'm trying to partner up with him so that I can watch and learn what he does in details of this work.  He's an investor who uses HML on most of his deals and probably does 1-2 every month or every other month.  
I am planning to put in 20k-25k to purchase the property and bring in another investor-B(not experienced) who will put another 20k-25k in and let me and the other investor-A handle all of the fun stuffs that are going to be involved on fix and flip.  
The investor-A already has his contractors, laywer, broker in his team and he's using me and the investors-B's money to do the deal.  
Some of you might say why not just do the deal by your self or with investor-B? Yes I've thought of that and I would want to also, but really I don't know where to start and how to do it with confidence. And because it's my first time, I want to do it right with the person who knows what he's doing.

So if these 3 people are teamed up to do that, what's the reasonable percentage to split the profit?

Home Price : $25k
Material and Labor & Holding Cost : $25k
Investor A : expericed with team (lawyer, contractor, broker etc.)
                 no money involved / will do most of work
Investor B : no ecpericence / will put in 50% of money / will not be 
                 doing any work
Investor C (me) : no experience / will put in 50% of money / will be
                         doing some works and learn from investor A

Any thoughts and ideas would be appreciated!
Jason K.

J Scott · Answer

Here's my general rule of thumb for determining how to allocate profits to a deal:

- 20%: Finding the Deal
- 40%: Funding the Deal
- 40%: Executing the Deal

So, in this case, B earns 20% for finding the deal, you and B split 40% (20% each) for funding the deal, and you and A split 40% (20% each) for executing the deal.

Ultimately, by those numbers:

- You get 40%, 
- A gets 20%
- B gets 40%.

Now, if A is going to be mentoring you, that's another consideration.  How much of your profits are you willing to pay to be mentored?

If A is a brilliant mentor and he will do most of the work, it might be worth most of your profits.  If A is just going to help you out by bringing in contractors and not really be a mentor, it may only be worth a small percentage of your profits.

For example, from here, you may give up 25% of your profits to A, so that you now keep 30% and he keeps 30%.

Is B being mentored as well?  If so, he should give up a percentage of his profits as well.

Does that make sense?

Eric M. · Answer

I agree that there is no right answer.

I look at it from Investor A's standpoint.  Unless he is a super generous guy who likes you and wants to do you a favor, he is not going to want to pay more than he would pay from his hard money lender.
That won't be alot for you and the other money guy but it will be something and you are getting the education.

Jason Kim · Answer

Vikram, I know eventually that I have to agree with you.  If I can get the extra funding from someone like in my family, then why not do it by my self.  My wife actually agreed on that too and I am starting to realize that I have to make this project of my own.  Having control on my own would definitly make a difference on experience.  
Thanks for clearing that up.

Vikram C. · Answer

Frankly, I would not bother doing the joint venture with him.  While it is good to have some knowledge and experience, there are ways to compensate for your lack thereof.  I would suggest the following:

1.  Make sure you understand the ARV of the property clearly.  Please comp it well and make sure you consider the days on market in that area.

2.  Ask other investors through your real estate club for contractor references.  Make sure you talk to the other clients of the contractors to ensure that you get only reliable and competent people.

3.  Get multiple time and cost bids from the contractors that you have pre-screened.

4.  Select one and go with him and make sure you control the cash flows so that he does not sit with your money.  If you have the time, by the materials yourself.

5.  Lawyers and agents are a dime a dozen and your A partner's contacts with such people is not worth any compensation, let alone a profit share.  I am sure you can find good lawyer and agent referrals through other real estate investors.  Once you find an experienced agent, you can ask him to help you with the comps and, perhaps, even with suggestions during the rehab.

In my opinion, your A partner is a waste of money.  If you do it yourself, you will probably also waste money on your first few properties but (a) you will learn a lot more and (b) the waste may be less than the cost and hassle of dealing with the A partner.

Good luck.

Elisha Lowe · Answer

Hi Jason,

I am sure that the experienced investors will chime in. I'm thinking, why so complicated. If you have all the financing and you just want some guidance and access to investor-A connections, why all this?

It sounds like a great plan for him and maybe a so so one for you depending.

Am I seeing this wrong?

Vikram C. · Answer

Jason, it is best to separate the roles of the three people.  Investor B seems to be a passive investor and you may wish to give him returns similar to what an HML will earn.  Maybe 18% per year or whatever is the norm in that area.  That will take him out of the equation and you can focus on your profit split with investor A.

Although investor A normally gets HML funding, I suspect he has to put some equity of his own into the deal.  In your case, he does not need to put any equity in it.  If possible, I would like to change that so that he has a financial incentive to do his best.  Try to get him to put whatever he normally has to put into a deal (e.g. 30%) into this deal.

The final arrangement might work as follows:

A puts $15,000
B puts $20,000
C puts $15,000

A and C manage the project and B gets 18% interest.  Why would A agree to do this?  Because (a) you have a profitable deal and (b) your $15,000 does not bear an interest (or has a nominal interest).

The final deal that you negotiate will have to be based on your relative negotiating positions but I suggest that you start with something similar to what I have mentioned and see how far you can go.

Bill Gulley · Answer

Well, there are alot of right ways to do this, why don't you just hire the guy as a contractor and if you know what you are doing, say with sheetrock, knockoff you labor or have him pay you as a sub. That would be doing the deal yourself, then just list the property.
          
          Just a note too, newbies in construction can be a pain, I mean look at this from the contractors' side too. Having new people in a job can easily hold the job up, mistakes made, who pays for those?
          
          This reminds me of people who wanted a loan to fix and flip properties who had no experience. Now, that house is my collateral for the deal. If I turn a couple guys lose on my collateral to fix up and disburse funds for doors, windows, etc. and it ends up those doors don't close properly or the windows won't open, they can't sell the place....where am I with this mess as a lender? I'm up a creek!
          
          That's why I suggest you do what you know you can do, buy the palce, hire a professional. Under that contract the work or do the work that you can do, where you can stay out of the way, where you can assist, but not be responsible for the final product. While you are doing that you learn. WHen the job is done, move on to the sale process. Might throw in a small bonus if the contractor will wiat to get his money at closing....much cleaner this way and less problems than a JV. Good luck, Bill

PS. Jason, can't see the side chrome strip, is that a '55 or '56? Nice!

Don Konipol · Answer

I have a little different take on this.   I commend you for realizing the value of Investor A's knowledge and experience. Inexperience in rehab can turn a good deal into a big loser.  Piggyback on A's experience and knowledge, learning all you can, and make a profit during this learning experience.

As a successful hard and private mortgage lender as well as investor, I have often made a profit by providing the money and for someone else to do the deal.

Of course I have sometimes been burned, also!

Don Hines · Answer

I agree with Steve. If you have that kind of money or backing and already sure about the cost of rehab and purchase, you are on your way. If "Part A" is a good guy, he will want to see someone suceed. Ask his advice when needed.
Listen to this.....
I have never; and I will repeat never made a profit on anything that involves someone else's knowledge and my money.
Never!! Never!!
Don

How to partner up on Fix & Flip

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