All Forum Posts by: Petar Radakovic

Hi everyone.  I'm in a bit of a tricky situation as I have a good family friend of the past 20 years looking to invest anywhere from $500k-1M.  To give a bit of background, I am a contractor in the DC area focusing on buying distressed properties, renovating them and/or building new, and selling them.  I am currently in the middle of one project and looking to line up the next house flip with this investor.  I am unsure of what kind of rate of return I should offer him, but here are my thoughts:

On the current project we are doing, we financed the acquisition through a hard money lender at terms of 5 points at closing and 14% interest only, 1 year balloon mortgage.  It is steep, but this is our first major house flip so I am not expecting the best rate starting out.

We were initially looking at doing construction financing to take over the HML and finish out the project, but ultimately made the decision to cut our budget and use our own cash to finance construction and just get the project done as quickly as possible (long story short, we were misled by a real estate "expert" with the CMAs and realized we probably couldn't sell the house for as much as we thought, so our goal here is to get out ASAP, but that is besides the point...). What I do know here is that the bank was offering between 4-5% on construction financing.

So that being said, there are also a couple of ways the investment relationship could work:

1) My investor functions strictly as a lender, using round numbers for example, let's just say he loans us $500k at some fixed interest rate over a period of time, and we make monthly payments to him over time. My thoughts are if a bank charges 5% and our HML charges 14%, then a fair rate would be somewhere in between those two numbers, closer to the bank rate, maybe 7-8%?? Either way, it could be structured as either a 1-2 year interest only balloon loan, or a conventional payment structure where each payment pays down part of the principal as well. In this scenario, the investor is not tied to the property and taking any of the specific investment risk, but is simply making money off of us as a lender. It could also just be considered a working capital loan in this case.

2) The investor partners with us in an LLC solely for a specific property and finances the acquisition and construction. In this scenario, we would need roughly 30% equity in the overall cost. Say for example it's a $1M package to buy/renovate, we would need $300k equity plus some working capital. We do all of the work through our construction company, where we are paid our salaries as well as some profit margin (roughly 10% of construction costs). Upon the sale of the property, any outstanding liabilities are paid off, the investor gets his money back, and then the profits from the capital gains are split on an agreed upon percentage. I have heard the term "70/30 split" loosely thrown around by some of my friends who are in commercial real estate. My understanding of a 70/30 split is the investor gets 30% of profits and we take 70% because we, as the construction company, put in all of the work and the time to make the renovation happen so it is fair that we get more than a silent partner because we did all of the work.

Option #1 appears to cost us much less in financing costs, but I do not have a good grasp on what a fair return would be for a private lender.  I am also thinking putting myself in their shoes, using an example of $500k interest only for 1 year at 5%, why would I tie up $500k of my money for an entire year to only get back $25k?  Maybe I am wrong in this train of thought, but any opinions are welcome here.

Option #2 has us splitting more profits with the investor and appears more appealing to the investor than just being a simple lender, but the investor is also liable for the risk along with us (if the home doesn't sell or construction costs too much or anything else that could occur).  Again, I'm not too experienced with what a fair return would be in this situation so any thoughts are appreciated.

Hi Qwesi, welcome to the area! Can you elaborate more on the types of projects you are looking at? Commercial or residential, multifamily, office, rough SF and size, stories, etc. Just a general range is good to know. I am a licensed GC in the area so I may be able to help depending on what you need.  Feel free to message me and I'll give you my contact info.

Hi, I am a licensed contractor in VA and my business partner is licensed in MD. We are both experienced with various types of home building and improvements. If you would like to make an introduction, I'd be more than happy to discuss any potential business opportunities with you.

Welcome to BP!  Spend some quality time reading and learning from this forum, as well as many great books that are out there.  It sounds like you are eager to get into the market, but make sure you are patient and do your research before jumping into a deal.  On your first deal you have to have a high degree of certainty you are going to make money.  Don't rush into it.  As Adrian ^^ mentioned, a partner could be a good option too.

@Kenneth Rayfield if you ever want to partner on a project I'd be willing to look at it with you.  But I am only in the DC metro area currently.  Not sure if you operate in that area or not.

As others have mentioned above, your contractor doesn't have a leg to stand on. Your argument is relatively straightforward in this case. The contract states an additional agreement should have been written for anything outside of the scope of work. It also states anything additional will only be performed under written change orders. There are no legal grounds for any contractor (at least in VA but I assume this is standard in all states) to perform additional work on their own accord that was neither requested or directed by the Owner and expect to receive compensation for it.

As far as proof or documentation, if it is non-existent that only strengthens your case.  I don't see anything you should worry about from a legal standpoint.  As far as actually getting the work done, there probably needs to be a face to face meeting at the property reviewing the condition.  If the contractor DOES complete the work under contract, you are still obligated to pay the contract value as long as the work is finished and up to standards; but not a penny more.

Just wanted to take a quick moment to introduce myself to the forum.  I heard about it from a good friend who I frequently chat with about real estate investment and both of our goals for our futures.

A little on my background: I obtained my B.S. in Civil and Environmental Engineering from the University of Virginia in 2009 and have worked in project management in the construction industry ever since. The projects I have worked on range from $50-150M in contract value, but my long term goal has always been to invest in residential real estate and establish a portfolio of stable assets. I am currently located in Fairfax, VA just outside of Washington, DC. I am 29 years old and have operated my own general contracting company since August of 2015, while also working as a project manager for large commercial construction companies (Walsh Construction of Chicago, IL and Grunley Construction of Rockville, MD).

Although the commercial work has been very exciting and rewarding, I am getting close to the point where I will be able to focus 100% on my own company.  The focus of my business has been residential home improvement, leading into buying and flipping properties, followed by new home building and managing rentals.  Recently, I partnered up with a MD contractor with a similar vision to mine.  Our current status has been working on a few home improvement projects while at the same time building our business plan for the partnership.  Both of us have a lot to learn about the real estate side of the market and hope we find the information on this forum beneficial.  In turn, I also believe we can share a lot of our construction knowledge and experience with fellow forum members to help them out with their ventures.