No Money Down In Practice

[Kevin Smith]

Hey BP Community,

As a new investor, I'm looking for some clarification on financing deals.  There's a lot of discussion around partnerships, private lending, and hard money, but I don't see much discussion on the actual mechanics - what these arrangements look like in practice.

My hope is this post can serve as a reference for those starting out, so we may get a better understanding of how these strategies are actually implemented as well as an ability to more accurately predict the profits and returns you and your lenders and partners can expect.

If those with more experience would like to revise these numbers and statements, it would be most appreciated.

These scenarios assume you, the flipper, are bringing none of your own capital to the deal.

Typically, this would mean 1 of 2 scenarios...
Private Lending - Someone you know brings 100% of project costs (purchase, rehab, acquisition costs, holding costs) to complete the deal and in return, they get a certain percentage return which comes out of your profit.
Hard Money + Partnership - You get a hard money lender to cover 80-90% of purchase+rehab and a partner to cover the remaining 10-20% as well as acquisition costs (including hard money origination and points) and holding costs (including hard money interest payments).

An aside about the structuring...
Private Lending - A promissory note is created, and your private lender lends to you or your business.  They are given 1st position on the property, so should anything go wrong, they can take possession of the property and get most if not all of their money back
Hard Money + Partnership - You and your partner form an entity. The hard money lender lends to this entity, and your partner contributes the remaining funds to this entity. If you have an LLC, it and your partner can be the two members of this entity.

Some examples for comparison...

6 month 70% Deal

• ARV 400k
• Purchase+Rehab = 280k
• Private Lender @ 15%
  
  • Private Lender brings 280k to cover purchase+rehab
  • Private Lender brings 10k to cover acquisition costs + utilities, taxes, and insurance for 6 months
  • Assuming 8% of ARV covers commissions and closing costs, you're left with 368k
  • You owe your private lender 290k for purchase, rehab, acquisition costs, and holding costs
  • You owe your private lender 22k in interest (15% for 6 months = 290k * 0.075 = 21.75k)
  • You're left with 56k (14% ARV)
• Hard Money + Partner where HML requires 20% down and charges 12% and 4 points
  • HML brings 224k to cover 80% purchase+rehab
  • Partner brings 56k to cover 20% purchase+rehab
  • Partner brings 22k to cover 10% of 224k HML (12/4 @ 6 months = 10%)
  • Partner brings 10k to cover acquisition costs + utilities, taxes, and insurance for 6 months
  • In total, Partner has brought 88k to the deal
  • Assuming 8% of ARV covers commissions and closing costs, you're left with 368k
  • You owe your HML 224k
  • You owe your Partner 88k
  • You're left with 56k to split with your Partner
  • Assuming a 50/50 split, you both get 28k
  • Your Partner makes 64% return (6 months for 28k for 88k)
  • You make 7% ARV (28/400)
• Hard Money + Partner where HML requires 10% down and charges 10% and 2 points
  • HML brings 252k to cover 90% purchase+rehab
  • Partner brings 28k to cover 10% purchase+rehab
  • Partner brings 18k to cover 7% of 252k HML (10/2 @ 6 months = 7%)
  • Partner brings 10k to cover acquisition costs + utilities, taxes, and insurance for 6 months
  • In total, Partner has brought 56k to the deal
  • Assuming 8% of ARV covers commissions and closing costs, you're left with 368k
  • You owe your HML 252k
  • You owe your Partner 56k
  • You're left with 60k to split with your Partner
  • Assuming a 50/50 split, you both get 30k
  • Your Partner makes 107% return (6 months for 30k for 56k)
  • You make 7.5% ARV (30/400)

6 month 80% Deal

• ARV 400k
• Purchase+Rehab = 320k
• Private Lender @ 15%
  
  • Private Lender brings 320k to cover purchase+rehab
  • Private Lender brings 10k to cover acquisition costs + utilities, taxes, and insurance for 6 months
  • Assuming 8% of ARV covers commissions and closing costs, you're left with 368k
  • You owe your private lender 330k for purchase, rehab, acquisition costs, and holding costs
  • You owe your private lender 25k in interest (15% for 6 months = 330k * 0.075 = 24.75k)
  • You're left with 13k (3.25% ARV)
• Hard Money + Partner where HML requires 20% down and charges 12% and 4 points
  • HML brings 256k to cover 80% purchase+rehab
  • Partner brings 64k to cover 20% purchase+rehab
  • Partner brings 26k to cover 10% of 256k HML (12/4 @ 6 months = 10%)
  • Partner brings 10k to cover acquisition costs + utilities, taxes, and insurance for 6 months
  • In total, Partner has brought 100k to the deal
  • Assuming 8% of ARV covers commissions and closing costs, you're left with 368k
  • You owe your HML 256k
  • You owe your Partner 100k
  • You're left with 12k to split with your Partner
  • Assuming a 50/50 split, you both get 6k
  • Your Partner makes 12% return (6 months for 6k for 100k)
  • You make 1.5% ARV (6/400)
• Hard Money + Partner where HML requires 10% down and charges 10% and 2 points
  • HML brings 288k to cover 90% purchase+rehab
  • Partner brings 32k to cover 10% purchase+rehab
  • Partner brings 20k to cover 7% of 288k HML (10/2 @ 6 months = 7%)
  • Partner brings 10k to cover acquisition costs + utilities, taxes, and insurance for 6 months
  • In total, Partner has brought 62k to the deal
  • Assuming 8% of ARV covers commissions and closing costs, you're left with 368k
  • You owe your HML 288k
  • You owe your Partner 62k
  • You're left with 18k to split with your Partner
  • Assuming a 50/50 split, you both get 9k
  • Your Partner makes 29% return (6 months for 9k for 62k)
  • You make 2.25% ARV (9/400)

Takeaways

• The 70% ARV rule is popular for a reason. It's tough to justify 80% deals unless you can save on interest and points from your lender and/or save on commissions. In the 80% deal above, if your private lender would accept 12% instead of 15%, and you can get your commissions down to 4% instead of 6%, you'd make 26k rather than 13k. One unforeseen expense, and you could likely end up making no money, or, even worse, be unable to pay back your partner.
• Even in poor circumstances (assuming you've still made some profit), your partner will most likely see a decent return (in our examples, 12% in the worst case and 107% in the best case).  Giving your lenders and partners a good return is of the utmost importance.  You're just starting out, so just be happy you're building a positive track record and generating returns for your partners.
• Pay attention to the affect of the down payment size, holding time, and interest and points.  Consider a 6 month project.  10% and 2 points may sound great, but if you're borrowing 90%, it's actually not much better than 12% and 4 points if only borrowing 80% (6.3% vs 8%).  If it's a 3 month project, you'd be looking at roughly 4% vs 5.6%.  Finally, if it's a 12 month project, you'd be looking at roughly 11% vs 13%.  Having said that, your partner will see a greater return considering he or she had to bring much less to the deal.
• If you have a significant spread and a shorter hold time, consider offering your private lenders greater returns. In our 70% example, you could have offered your private lender 30% and still made more money than in the HML+Partnership scenario.

Feedback is greatly appreciated