Borrowing a Down Payment from a Friend for a Fix & Flip

[Brad Hornecker]

First of all, here's the basic info on this flip deal.

$450K Purchase Price

$570K ARV

$30K Repairs

I initially reached out to my best friend who has talked with me on partnering in the past.  He is a successful professional musician, very smart financially, and he would like to start investing in real estate as well once things slow down for him.  I do not have much capital at all, and was mostly focused on wholesaling deals, but I see an opportunity to make much more doing the rehab work myself and flipping this house, I would just need someone to cover the finances.  We talked about cosigning on the mortgage, and him paying for the down payment, repairs and holding costs, while I would manage the rehab work, and we would split the profit 50/50.  I have seen other investors partner in this way and I think it is fair and makes sense so long as the numbers are quadruple checked and there is enough margin for error to mitigate the risk of the person paying for everything ending up underwater.  His financial advisor suggested a different option, which I would love to hear your opinions on.

His advisor basically suggested loaning me the money I need to make this deal happen, and being paid back plus interest.  This takes his risk of not making his money back out of it, and places the responsibility on me to pay him back once the flip is complete.  I would not have to split the flip profit 50/50, he would make $10-15K in interest.  I was pretty surprised to hear this suggestion, because although it takes a lot of risk off of him, it does still remain as he is relying on me to pay him back instead of having that loan secured by the asset of the house.  I am looking into financing options, but if I did a conventional 20% down, I would be borrowing about $115-120K for the down payment and repairs.

There's a lot of risk for me by going this route, but I'm confident in the numbers on this deal, and for me the reward is high enough that I want to go through with it. My long term strategy is to BRRRR out of state, and my short term plan is to wholesale and flip locally to build capital to get me to that point. This deal would be an incredible first deal for me because it would give me the capital to reinvest and not have to partner on deals in the future just to make it work. What do y'all think? Would you do this deal? I would love to hear what more experienced investors have to say. Thank you for reading :)

[Brad Hornecker]

Originally posted by @Jaysen Medhurst:

@Brad Hornecker, I like the suggestion of the FA. It's basically your friend giving you a hard-money loan, which is how a lot of flippers work. The problem you may run into is that you're basically financing 100% of the deal. Getting an 80% conventional loan on such an expensive property may be tough if you don't have any of your own skin in the game.

What I don't like is the deal you're pursuing. Based on the few numbers you provided it's a loser. Based on the 70% rule, you shouldn't be paying any more than $369k for the place. Why do you think that you'll be able to get it for $120 below ARV if it only needs $30k of work? That isn't a lot to do at that price point.

Thanks for the response Jaysen. Here in California, my experience and research shows me the 70% rule very rarely works out, homes are just too expensive that that 30% discount we hope to find translates to hundreds of thousands, and those deals don't come by that often.  I have already seen the house with an experienced contractor who priced the rehab at $25K including a $7K in misc repairs on top of the quotes he gave for everything else the home needs, and the owner knows about where my offer will come in.  I initially planned to wholesale this deal, but am just gathering opinions on this financing strategy to see what others think and if it would be advisable to take this deal down myself given I would have to finance literally everything.