Hard money or bring on a partner? What would you do??

Question

I have been investing in real estate for many years, have done a few flips which I funded alone and did all the work myself. I have learned that neither of these options are very smart. I know have a great contractor that is going to be handling all of my flips but the issue comes down to financing. I have two options here, option one is hard money. This money is easy for me to get but cost me 12%-18% depending on property and the investor involved. Option 2, I have a wealth investor that is looking to develop a partnership with me. The partner will supply 100% of the funds to purchase and repair home. The split will be 60/40 in my favor. Mind you I bring all knowledge and experience to the table, plus my contractors. Which would you suggest to be the smartest move for me to expand my business?

Cal C. · Answer

I'm curious how many investors you've found to take all of the risk for 20% of the profit?

Jeff S. · Answer

"They will technically hold a note on the property."

No, they won't technically hold a note on the property.  This makes no sense.  If your investor is providing 100% of the money they should hold 100% of the ownership.  Why should they buy you some percent of a house right off the bat, or even a percent ownership in an LLC.  You put nothing in.  This could be construed as a gift with all the associated tax considerations. Better see a CPA.

Your partner should buy and own the house outright, Terry, and presumably fund the rehab.  You would have a partnership agreement with him or his entity.  He is taking 100% of the risk, but since you are going to do all the work a 50/50 split is traditional here, though you can cut any deal you want. I can't imagine offering less than the 60/40 split you noted.  As Cal C. suggested, 20% would be preposterous.

If you don't or cannot do what you say, your partner can let you go for maybe a finder's fee, as defined in your partnership agreement.  He then gets to deal with a busted flip. I can't tell you how many of these we've seen, and I imagine this prospect might not be as appealing once he realizes the risks he is really taking.

Alternately, you can accept some of the risk by taking a loan from your friend, buying the property in your name or entity, along with the rehab funds.  He would then become your private/hard money lender and make a return from the interest and even points. To minimize your monthly costs, these could even be deferred until you sell.

You would keep all the profit, which would be substantially more then from a partnership if your loan terms were typical of an HML.  Much cleaner, but less profitable for him and probably not as appealing.  (Alternately, you could also share some of the profits. Look up a shared appreciation mortgage.)

Nothing is free or without risk, Terry.

Jay Hinrichs · Answer

@Jean Taveras  you will have to excuse me but can you tell me what FA is in context with this subject

@Terry Brennan  here is how I look at it.. I have been a HML for about 30 years now.. having depending on the RE cycle 30 to 50 million to lend.. So I get the HML angle and agree with @Jeff S.  that a great relationship with a HML is very valuable .. I cherished my long term clients.. and I have had them going on two decades.  I had a company in Oakland CA that I ran under my CA broker license and one in Oregon which requires full NMLS mortgage banker status.  So we are highly regulated.

I decided 3.5 years ago to put my Mortage banker license on ICE as well as my brokers license and take the capital I have which is fully 8 figures and ONLY do JV deals.

Why you ask... well you have two kinds of borrowers or partners ones who have responded here that simply look at whats cheapest and go with that

And then you have others that want to really scale up.. If your capacity is to only do 3 to 5 flips a year then HML is probably the route to take.

But if you want to do volume then a capital partner in my mind is something to consider.

My clients do volume... because I am a capital partner they pay no FEES Points etc up front. they pay no monthly payments... This is huge when you want to scale. if your borrowing and have to make payments this constricts your growth.. plus puts a lot of stress on a person... and god forbid you miss a payment.

So real world examples:

One client in the deep south I have purchase and provided rehab for 140 properties for them in the last 28 months. I also arranged the take out ( long term loans.)  so now they have a monster portfolio and they put not ONE dime of their own capital out.. but did they work  their @@s'a off buying and rehabbing all these units you bet.. their positive cash flow now is about 25k a month and growing I am closing a 12 home purchse for them on Friday not one dime out of pocket and all rehab funded.. NO HML would even come close to considering that.. But I earn TWICE what a HML earns.. so I take risk but I do far better than when I was a HML.. many of my deals I make over 100% APR compared to a measly HML at 2 points and 12%.. but my guys got smoking deals and they pay me off in 90 days so the total dollars are nothing.

So you can go either way.. and I have about 20 clients like this. and I have no website and do not advertise and have more business than I can handle.. ask any HML about deal flow today...

Ken Deboy · Answer

So if something goes wrong, you lose nothing and the investor providing you with the funds is taking all the financial risk? You ought to be giving the investor 60% since they are the one with something to lose if the deal isn't profitable.

Cal C. · Answer

if you are giving them a note then you may be confusing private investors with a partner.  A financing partner assumes all risks.

Cal C. · Answer

If everything goes right and you sell it quickly then hard money will probably be a better option, but that rarely happens as you probably know since you've done a few flips.  50% is usually the common split from what I've seen so getting some one to take all of the risk for 40% of the profits is a good deal.

Jacob Sampson · Answer

IMO, it just comes down to the cost of money.  You can pay a HML whatever % for a finite amount of time. For example, after the home is rehabbed and rented you shouldn't have much trouble moving it over to bank financing.  On the other hand the partner takes whatever % for eternity.  That's expensive money.

Don't get me wrong, I actually think partnerships, when done well, are fantastic.  I purchase all of my rentals with a partner.  I just think the partner needs to bring more than just cash to the table.  My partner and I are both intimately involved in the business.  We have similar life goals we are working towards, we have been through some rough times together.  Great partnerships are fantastic, and hard to come by.

Don't partner because you see a big pile of easy money.  That is a disceptive pile of cash and comes with a very high cost.

Jay Hinrichs · Answer

@Jean Taveras  thanks I always miss that one.. I guess since I have never used one I don't think of them... good FA is critical for many folks.. as long as they are not selling you their product they get paid to sell and are truly independent.  many insurance folks are FA and they just sell insurance products that may or may not be that great of deal.

Hard money or bring on a partner? What would you do??

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