Cash Partner Deal Structure

[Mike Kehoe]

Hi all!

I've recently become a full-time investor and am new to Bigger Pockets. I've partnered with a deal provider that's been investing for over a decade and has always used his own money/credit lines. The deals I've done so far are with my own money as well.

My partner wholesales, flips, and also BRRRs single family and small multi-units in Chicago. He does a substantial amount of deals with his own money, but I've come on to help grow the business by connecting us with cash partners. He has four full-time GC's that only work for him, so we have sufficient workforce to do more deals. To do so, we need more capital.

I'm currently reading Raising Private Capital by Matt Faircloth, and have gotten great information from it, but I wanted to throw these questions out to the BP community as we are soon meeting with potential cash partners:

How should we structure deals with our cash partners? Our projects will be less than six months.

Do we give equity on each deal and allocate 20% of net to the cash provider?

Or should we offer an APR on their money and keep rolling profits and initial investment over into the next deal? What APR would you give? How have you structured that before?

Do we offer more if they are in second position, only providing the downpayment for the hard money loan? What are examples that you're doing?

Thank you so much in advance! Please excuse my ignorance if I've posed some of these questions and scenarios wrong. I'm learning!

- Mike 

[Ed Matson]

For funding flips with private lenders, I think the simplest and a very equitable structure is to simply do it with debt. Since your partner is experienced, going with private money may well be an option vs. hard money loans. Typically a private lender will be looking for a return of about 8% and he will want to be in first position. After several loans from a private lender, you all may want to expand the relationship by making him an equity partner. That structure is much more complicated.  How much should the equity partner get?  What is their proportionate contribution to the success of the project?