Splitting Profits with a hard money lender

[Suzanne M.]

I don't know how to fairly split the profits because the hard money lender is giving $40,000 cash for the down payment on a $545,000 apartment complex. (We will be assuming the remaining $123,500 to make 30% down.) This is a buy-and-hold property.

Does anyone have any experience with this? 

[David Ginn]

@Suzanne M.

You'll see lenders do a 50/50 split. You'll see them do a 90/10 split. But that depends upon your experience because the lender is usually gonna want more profit based on the experience of the buyer or flipper.

If your experience is low. If it is your first deal. Lenders can command a 50/50 split all day long and probably get control like we give them in our system. However, if they are an experienced flipper and have done a hundred homes, or are in a system that's done hundreds of homes, then 20 percent would be more reasonable. Or 10 percent if you know what you're doing and have a track record.

By that same token, you're also looking at what your lender’s options are. If that lender has other options that he can clearly make a better return on, and he can prove it and show it to you: rate of return, amount of dollars to the stock market, what everyone in that area is doing, that they're all making money investing in a local business or whatever, then the only way you're going to get him to come to the table is if you're offering a greater return than what they can get elsewhere with a lower risk. So the market conditions will tell you that.

In California, for years, the most lenders could make was 6 percent because that's all the investors could pay. So in California most lenders don't make 12 percent interest from what I've heard, they make lower because the market is competitive to the downside. So you gotta look at what a lender can go do to make more money than what you're gonna put him into.

Secondly, is how much competition is in the market based on the area. If there's plenty of money in the market and the interest rate is being paid at 6 percent, then that water's gonna level between those two equations and you're gonna start to see where it nets out as far as what that lender’s willing to do for you interest rate wise. So it's kind of a subjective question. You’ve got to look at the full picture or the full financial portfolio of the person who’s lending.