Partnering up for a percent of net profits

[Account Closed]

Hi All, 

I have a deal that came across the table and am curious what you think or if you have any advice. The investor purchased a triplex for $1.4mm and will put about $150k into it over six months. with about 20% down and points, the cost of financing will be about $75k. The investor will be about $1.75mm into it on the conservative side. 

The investor has offered us to join with $80k for a certain percent of net profits. The investor will be using approximately $320k of their own money. The resale value should conservatively get $2mm. 

My question is, what is a common stake for such a deal? We have been offered 3% of net profits,  of course that's the low so we will definitely negotiate up, the investor has even mentioned that if the 3% is too low we can go a little higher. Lastly how does one structure this type of deal?

Thanks in advance for the comments. 

[Jeff S.]

I agree with Charles here. You're pretty much funding the loan cost, @Account Closed. By my estimate, the deal will net about $200k, or 10% of the ARV -- very typical. You'll earn 3% of that or $6k. In six months, this is a 15% annualized return (12/6 x $6k/$80k =15%). That's in the realm of a secured 1st position hard money loan with points and interest.

You will have no secured position and I can't tell how your equity is established. If the rehab goes on longer than 6 months, and they often do, your annualized return will drop. Of course, if there is no profit, which could simply be due to skillful accounting, you'll earn nothing.

I don't know the terms of the 1st position loan, but you might suggest participating in it with a fractionalized interest if that lender is open to it. This is much safer and maintains your return over time and your safety. This is also a way for the other investors you mentioned to get involved without competing against each other.  Many higher value flips are funded like this, with several investors on one first position note and deed of trust. Good luck, Roald.