I've been offered 100% Financing for buy and hold projects. Is this a good deal?

[Aristone Louxz]

Hello BP Community, 

Currently I have been buying and flipping properties in and around the Philadelphia area. I have been offered an alternative investment opportunity to flipping. First, here's some background on our current model.

 As of this year we have locked in 5 projects and completed 3 of the 5 (East falls and queen village one to be completed this month other to be completed by Jan-Feb). My financing structure now is 90% of Acquisition and rehab financed with Hard money. The remainder closing cost, down payment etc  is financed by a partner who I offer a 20% return on their money. That partner also offers a line of credit for construction draws and that line of credit is paid off with each reimbursement I get from the construction draws of the hard money lender.  Essentially I am 100% financed for the flip.

I like this flip model but I have been offered 100% financing for buy and hold projects instead of flips. Here's the structure, the project must have 25%-30% value added Example : we are all in  (acquisition, plus rehab, closing cost, holding costs etc = 200K the Value created must be $50k or greater). I will be finding the off market properties, once we acquire the property I own 10% from the get go, once property is remodeled and appraised I own 25% of the Value created. I also get the whole remodel project which can be another opportunity to make money with my team Lets say $10k at the very Least. So using the previous example, All in $200k but the property is worth $250k I own $10k equity once we purchased the project (assuming we bought it for $100k for easy numbers sake), I then do the remodel and create $50k in Value. Now I own 25% of that $50K which is $12,500. Total ownership  $22,500 in equity and $10k on the construction end. 

Now After this He offered to either cash me out or roll it into the next project....

Is this a good deal? Has anyone done something similar? Should I negotiate any terms? Would anyone cash out or roll it into the next project?

Thanks BP Fam! Looking forward to the responses!

[KC Pake]

Quote from @Aristone Louxz:

Hello BP Community, 

Currently I have been buying and flipping properties in and around the Philadelphia area. I have been offered an alternative investment opportunity to flipping. First, here's some background on our current model.

 As of this year we have locked in 5 projects and completed 3 of the 5 (East falls and queen village one to be completed this month other to be completed by Jan-Feb). My financing structure now is 90% of Acquisition and rehab financed with Hard money. The remainder closing cost, down payment etc  is financed by a partner who I offer a 20% return on their money. That partner also offers a line of credit for construction draws and that line of credit is paid off with each reimbursement I get from the construction draws of the hard money lender.  Essentially I am 100% financed for the flip.

I like this flip model but I have been offered 100% financing for buy and hold projects instead of flips. Here's the structure, the project must have 25%-30% value added Example : we are all in  (acquisition, plus rehab, closing cost, holding costs etc = 200K the Value created must be $50k or greater). I will be finding the off market properties, once we acquire the property I own 10% from the get go, once property is remodeled and appraised I own 25% of the Value created. I also get the whole remodel project which can be another opportunity to make money with my team Lets say $10k at the very Least. So using the previous example, All in $200k but the property is worth $250k I own $10k equity once we purchased the project (assuming we bought it for $100k for easy numbers sake), I then do the remodel and create $50k in Value. Now I own 25% of that $50K which is $12,500. Total ownership  $22,500 in equity and $10k on the construction end. 

Now After this He offered to either cash me out or roll it into the next project....

Is this a good deal? Has anyone done something similar? Should I negotiate any terms? Would anyone cash out or roll it into the next project?

Thanks BP Fam! Looking forward to the responses!

Hello Aristone,

It sounds like you've been quite successful with your flipping projects in the Philadelphia area, and it's great to hear that you're exploring new investment opportunities. The buy-and-hold strategy you've been offered certainly has its merits, especially with the 100% financing structure. Here are a few considerations and potential questions to help you evaluate this opportunity:

1. Risk vs. Reward: Compare the risk profile of flipping vs. buy-and-hold. Flipping generally offers quicker returns but can be riskier, especially in fluctuating markets. Buy-and-hold can provide stable, long-term gains and potential rental income, but it usually requires a longer investment horizon.
2. 
   Equity Accumulation: Your proposed buy-and-hold deal allows you to build equity over time. However, consider the rate at which you're accumulating equity and the potential appreciation of the properties. The 25% ownership in the value-added seems attractive, but ensure it aligns with your long-term financial goals.
3. 
   Cash Flow Analysis: For buy-and-hold investments, it's crucial to consider the cash flow. Will these properties generate rental income? If so, how does this income compare to your current returns from flipping?
4. 
   Market Dynamics: Research the local real estate market trends. Is the area appreciating? Are rental demands high? This can significantly impact the success of a buy-and-hold strategy.
5. 
   Exit Strategy Flexibility: The option to cash out or roll into the next project offers flexibility. If you choose to roll over, it might compound your gains over time. Cashing out provides immediate liquidity. Your decision here might depend on your immediate financial needs versus long-term investment plans.
6. 
   Negotiating Terms: Always consider if there's room for negotiation, especially regarding your ownership percentage or the terms of financing.
7. 
   Consulting with Professionals: It might be beneficial to consult with a real estate attorney or a financial advisor to review the terms of this deal and ensure it aligns with your investment strategy.
8. 
   Diversification of Investment Portfolio: Consider how this buy-and-hold strategy fits into your overall investment portfolio. Diversification can help mitigate risk.
9. 
   Management Responsibilities: Buy-and-hold investments typically come with property management responsibilities. Are you prepared to handle or delegate these tasks?
10. 
    Tax Implications: Different investment strategies have different tax implications. It's worth consulting with a tax professional to understand how this will affect your overall tax situation.

Whether to cash out or roll into the next project depends on your financial goals, risk tolerance, and investment strategy. Cashing out offers immediate returns, which can be reinvested elsewhere. Rolling the investment over could potentially lead to greater long-term growth.

I hope these points give you some food for thought. It's great to see you're considering all angles and seeking advice from the BP community. Best of luck with your decision!

KC