Private Investor Terms

[Drew Gilmore]

Hi all, 

This is my first post on here--thanks in advance for going easy on me. 

I'm curious to get feedback on terms for private investors. I recently met with a prospective investor who was interested in partnering with me on flipping a house in the suburban San Diego area. He's willing to finance a good deal if I can find one and he wants the following: 8% return on his investment, 60/40 split of all profit thereafter. (I would be responsible for overseeing the rehab). This would serve to get some cash in my pocket as well as establish a working relationship with this guy. 

I'm wondering if anyone has encountered something similar? Are these good terms? Any feedback would be helpful. 

[Justin R.]

@Drew Gilmore I do my own projects and lend money to others as well.  If you have no experience and no money in the deal (and he has both), those are fair terms - this guy is taking a lot of risk with you and will have to get involved at some point.  Presumably there's also no points and other overhead fees that lenders normally charge (I'd expect him to be holding title to the property in his name).

FWIW as a point of reference on how I do things, it changes if you can put down some cash ... even if it's only 10%.  In that case, I'd offer a 50/50 split of the gross profit, with a preferred return of 8%.  That might not make sense, so here's a simplistic happy case example that ignores lots of expense detail but gets the point across:

• Purchase: $400k  ($40k from you, $360k from me)
• Reno: $100k ($100k from me)
• Sale: $600k
• Time-to-Sale: 6 months

Upon sale, you get $40k back and I get my $460k back.

Gross Profit: $100k (you get $50k and I get $50k)

• I get 8% annual return on my money ($460k * 0.08 / 12 * 6) = $18,400
• You get 8% annual return on your money ($40k * 0.08 / 12 * 6) = $1,600

Net Profit: $80k 

• I get a check for $50k-$18,400 = $31,600
• You get the rest

If there's plenty of profit, we both participate in the upside and everyone's happy.  But, if you screw up and there's not enough profit, I may end up getting paid more than you.