Hi guys. I'm starting to learn about real estate investments - flipping houses to be specific. And I first want to say thank you for this venue and all the people who are readily available to help. I had a simple question that I'm sure can get quite complicated, but if I were to raise 300k and to purchase a home thru a loan and use the 300k for down-payment and mortgage costs until rehab and the sale was finalized - If the investors weren't actively participating in the rehab but were just the financiers of the flip, how would we set up the sharing of the profits?

Ive looked online and it's a little daunting as I haven't yet learned all the terminologies and it gets too complicated for a novice like me real fast. And just the landscape of real investments is so vast its hard to find one source for this particular arena. Thank you everyone in advance.

0 Votes

2 Replies

Jump to Last Reply

Sort By:

Oldest

258
Posts: 227
Votes

Ryan Luby

Pro Member

Rental Property Investor
CT

Ryan Luby

Pro Member

Rental Property Investor
CT

Replied January 31, 2020 06:19

@Min Kang

Not a financing expert but, I think what your asking is essentially how to split profit for a flip, and in your case what's a common split for a lender holding just the 1st position lien (lending only the purchase amount)?

Either way, everything is negotiable but as far as what's common it sounds like they would just be a private lender, or hard money lender, or even conventional financing.. in each case these lenders could all just be 1st position lien holders meaning they are strictly financing the purchase of the property (generally with you providing a down payment and closing costs) and not the rehab. In these scenario no profit split is necessary

If you are working with a private or hard money lender and you are attempting to negotiate a great rate, you could offer a profit split in some instances. I haven't done this personally, and most likely would only happen with a private lender. In this scenario the terms are between you and the lender, and you would have to run numbers to work back in order to find what a great rate is for you, and a great return for the private lender.

The reason you are struggling to find an answer is because profit splits are completely negotiable depending upon the structure of the deal, and rates vary depending upon your market a little, also your experience, down-payment, and wether you're raising just the purchase price (1st position lien), or the purchase and rehab (1st, & 2nd position liens), or just the rehab (2nd position lien), or even just raising the down payment.. there are a lot of scenarios.

I wish I had a more direct answer, unfortunately I think you have to keep learning about investing, about your market, and about the financing options available to you. But in short, if you do a deal where you cover the down payment, and the repairs I recommend not splitting the profit with the 1st position lien holder unless you are able to negotiate great terms or something..

Hope this helps a little

Best,

Ryan

Ryan Luby

0 Votes

1,834
Posts: 1,372
Votes

Frank Chin

Investor
Bayside, NY

Frank Chin

Investor
Bayside, NY

Replied January 31, 2020 06:35

Originally posted by @Min Kang:

There's no one size fit all situation. Each partner and deal is unique, so is the arrangement.

One example, there's a realtor in our area doing pre-foreclosure deals. He secures the deal, as he was a realtor, he find buyers. He locates money partners, I was one of them that he found. I fund the deal, deal with contractors doing rehab. On completion, we split the profit 50/50 provided the flip succeeds. If not, the backup plan is for me to close on the property in my name only, didn't want any partners in the rental, he gets zero, and he's OK with it. We agree that's the ideal way for us to deal with risk and reward. I know deals that goes 50/50, and one partner felt he did all the work, took more risks, but not here.

If you look at it, I'm taking more risks. However, owning several rentals, holding down a full time job, I had no time to run around searching for deals. He spent several years in the business, made connections with attorneys specializing in foreclosures, helping client with referrals, and give him the lead if the client wishes assistance.

He found a deal soon after. The seller was behind on his first mortgage and SBA loan. The property need $10K rehab, and another $10K to catch up on the 1st mortgage, and to fund things till a buyer is found, and the deal closes in 6 months. We had a P&S assignable contract with the seller with closing in six months.

What happened? We found a buyer at the projected price, buyer got a mortgage, and a letter from the mortgage company confirming it. It's a go. Then one week before the closing date, buyer said he lost his job, and the deal was cancelled. Seller refused any extensions as it took us 13 months, not the six. I wound up funding another $15K because it took so long to fend off the mortgage holder, and get extensions on the P&S contract. So the backup plan was activated, I got the mortgage, closed on it, and his share is zero for 13 months of running around. Felt a little sorry for him, but that's the deal.

But we with these deals, you can't anticipate everything. The buyer paid almost $13K into escrow. Most of the time, when deals fall through, out of courtesy, escrow funds are returned to the buyer. But I fought with the buyer attorney keeping half, and my partner felt he should get half of the half. As I felt sorry for him, even though it was not in our written partnership agreement, I gave him half.

The property has an ARV of $130K at the time, we got it for $70K. I would have picked up a property closer for rental, and not a SFR. I was a little miffed. This was in 1984, and I still have it, now mortgage free. Currently has an ARV of $460K, tenants paid off the mortgage over time, and cash flows over $1,500 to $1,800 monthly with market rents.

Didn't go as planned, didn't make a quick $25K over 6 months, but at the end, both of us did OK.

0 Votes

NREIG