How to know if an investor(s) is being honest on promised return?

Question

I am looking at partnering with a man who says that he can get me 25-120% returns on a flip. This seems way too high for my understanding and sounds a bit sketchy. For example, if I invest 10K in a deal, and my money either goes to closing costs or part of the rehab, he says that I could make around 3-5K after about 2-3 months. It sounds reasonable I guess. I am unsure of what a regular return on a flip is, hence my question. I am a complete newbie to this business and I want to avoid losing my money. Any thought?

Joel Owens · Answer

Daniel assess your risk to capital.

How long did 10k take you to save up for? Months, years, etc.? Is it a larger portion of your net worth?

There can be a different risk profile for someone worth millions dropping 10k on a new potential partner on a deal that might be higher risk. If it goes south the investor might just write it off and average it out to positive with their other investments rather than spending tons of time with an attorney and costs to try and rectify the investment to perform or gain control over.

It's all about what is the upside, risk profile to capital, and how long to generate the desired return, and percentage odds of it going as planned.

Ned Carey · Answer

There is no standard or normal return on a flip. A quick and easy flip that is fast might earn less than a long intensive rehab. Some deals are very good and some are just so so. Of course some areas are more competitive and some areas less so. So there is no typical number in either dollars or % return.

To answer your question it is call "Due Diligence". You need to check out the reputation of the guy, check out previous deals, verify those deals are real not made up deals, and most importantly check out this particular deal.

To do that you can often look up property transactions online in the public records. That way you can verify what he bought properties for and what he sold them for. Post here when you get more details about this deal and we can help you evaluate.

John Thedford · Answer

Sounds too good to be true. If this guy is THAT successful he should be rolling in cash.

Daniel Moscoso · Answer

Thank you all for your comments. These have helped clear up my questions and concerns. Thank you!

Ned Carey · Answer

@Daniel Moscoso if someone is simply the money partner on a deal, the easiest and most common way is to offer them a stated amount of interest return on their money. For example you give them 12% on the money the lend you and the get a mortgage or deed of trust to secure their loan.

Daniel Moscoso · Answer

@Ned Carey Thanks so much for your thoughts! I am still in the process of doing my due diligence, I took your advise and am looking at the public records. @Rick Pozos, I feel a little better hearing that you can make high returns like that, if it's structured right at least. I would have my name in the dead as well, which is good collateral. Rick, I also wanted to ask how you would present a deal to another investor? For example I find a good deal, but I need some help with the rehab and I need a partner. What variables would you share with a prospective investor? I have an idea of what I'd share, like the potential return (cash on cash), what the money will go too, the ARV compared to the purchase price and the approximate length we plan to hold on to the property. What else? I don't know if you can ask stuff like this on Bigger Pockets, but those are my questions. Thanks for all the help everyone!

Rick Pozos · Answer

Hey @Daniel Moscoso we probably need to know the person's name or company that they operate under. This way we can check the deed records to see how many properties they have bought and sold here in Bexar County.

I must say that I have purchased some properties sub-to that needed 20k to catch up payments and make some repairs. I split the deal with a family member. They put all the cash and we split about 20k. This ended up being about 50% in 6 months or 100% annual return. It would have been cheaper to get a 2nd on the property, but most people dont like to be 2nd. He ended up managing some of the work(contractors), so it worked out for me since I had several rehabs going on at the same time. At the end of the project, I made 10k for doing almost nothing, he made a great return.

I did put his name on the deed though. We were 50/50 owners from the start.

Daniel Moscoso · Answer

@Nick C.Thanks for the help Nick!

Nick C. · Answer

I sure don't. Hopefully someone from San Antonio can chime in.

Daniel Moscoso · Answer

@Nick C.Got it! yes he does have a good track record as far as I know. I will have to ask for more details on previous projects. So you would say that 10-25% return on a flip is a standard expected return? Would you happen to know what a return on a flip would be for Texas? That's the area I am working in.

How to know if an investor(s) is being honest on promised return?

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