Restructuring of Finance

[Brian Davis]

I currently have a partner in a private equity firm. They lend 100% of the necessary costs for a flip from start to finish. I have been working with them for a few years now and we have completed roughly 100 homes together over that period of time.

As I look at the terms and costs associated with their money, it is very clear that I have a bad deal. I was hoping that through a large increase in volume that I would be able to deal with the inflated cost of money, but it is really starting to weigh heavy on me especially when we might have a slow month or when a property is marginal.   In the past, we would still do well even on marginal deals, but with the points I agreed to pay (considered a preferred return in the private equity world), it turns ok deals into something I shouldn't even waste my time with. It turns great deals into good deals, and good deals into so-so deals.

Also, by paying more points and being forced to take the entire amount of money up front, I pay interest on all the money for the entire project. It is not prorated by the day like a traditional equity line. 

A few days ago I saw the numbers come through for 2 deals that we just completed and realized I need to change direction immediately.  I have a very good relationship with a hard money lender that I have done maybe 30-40 houses with in the past and he is willing to lend me most of the money I would need but there is still the need for operating capital and a need to have money for repairs until they are released on a  draw from the hard money guy. 

I am wondering what the best solution would be for this. If someone has any suggestions. I was thinking to find some private investors that might be willing to provide smaller lines of credit that could possibly be placed in 2nd position against the property but I know the hard money lender frowns on 2nd mortgages.

I know that raising private money could work but we have 2M working at any given time and it could be very difficult for me to find that much in short order.  The business is running and we are constantly buying homes, so I need a cost effective solution that we can move to immediately. 

Any advice would be very welcome. Thanks!