How to Structure Returns for my Cash Provider

Question

I have a cash provider partnering with me in flipping houses this year. I've been doing my homework and developing a business plan for us to abide by throughout the process. However, I'm not sure which way I should bring value to my investor. He has $330,000 in cash to invest in a flip after selling his primary residence, and after talking about real estate investing, he told me, "You be the brains, and I'll be the bank. As long as you can get me a higher return than CD's, stocks, and mutual funds I'm all over it." After hearing that, I knew I've struck gold, I know for a fact that he can beat the market investing his cash in a few successful flips with me this year. The only problem is, I'm not sure in what form I'm planning on getting him that return. Should I borrow his capital at an interest rate, and keep the profits from the flip myself? Should I give him both interest and equity in the flip? Should we split profits 50/50? After thinking it out, I figured the safest and most profitable bet might be to split profits 50/50, but what if his 50% doesn't equate to a high enough CoCROI per flip? It's quite possible I'm totally over thinking this. If anybody knows what I should do from past experience, I'd greatly appreciate it!

Alex F chang · Answer

What about leveraging his money with hard money lenders and then do a 50/50 split? This way, the amount of capital used by him is less and return would be higher, thus, a higher CoCROI. You would also be able to do more deals this way

Tristan Beavers · Answer

@Alex F changExcellent idea man, I'll be looking for ways to use this strategy after I reply to this thread. Time to do my due diligence on hard money lending.

David M. · Answer

@Tristan BeaversGiven what he said, I might start with just taking a loan from him for the properties. Like he said, "he is the bank." CD's aren't even doing 1%. stock and bonds is questionable. Even if you offered him 5% it might be a good/fair enough, just spitballing.What is your income situation (mainly a rhetorical question since this is a public forum)? As mentioned, leverage his money which would have both of you with "skin in the game" as they say. I'm not sure that a 50/50 split is the way I'd go... But in this case it may work.regarding sufficient return, Lets you consider a $100k deal and he is putting in $20k. If you give him $10k in profit that is a 50% return! However, I would ask if getting 50% on 20k good enough? If I was him I might say no since the so little funds were invested. But, you did mention flips... Are you thinking of using his money to fund the reno? Now the 50/50 can make more sense to me. And lets say he puts in $80k for the reno. If you still gave him / made $10k in profit, that is still a 10% return, which is pretty good. Also, I would like to think that you did it in less than 1 yr. So annualized that would be a great annualized return.Quite honestly, you should look at your numbers. See what makes sense to you, what would make sense or be a good offer to him. Straight borrowing should give you a great upside. profit sharing with him hopefully will give him a bonus. With regards to downside risk, the former gives him no risk (unless you can't pay him) while the latter could be structured where he loses as well --- probably not what he wants to hear, however. But, a loss on one deal could be made up on another. Same thing happens on the stock market.Sorry I don't have a single answer, but I hope this discussion helps. This is interesting. I'd be happy to chat. Good luck.

David M. · Answer

@Tristan BeaversWell, if you can do 2 deals a year, his overall ROI will be fine. If you can handle more deals, then go ahead and do some leverage. Otherwise, i wouldn't bother with the additional cost of the loan and the cost of money. Just go pure cash.See if he is willing to reinvest his profits. That will give you some extra margin. I'm saying borrowing is bad, just perhaps not a necessary cost to burden if you don't need it.Good luck.

Tristan Beavers · Answer

@David M. Hey David, thanks for the thorough reply! I live in Jupiter, FL, and we'd be doing all of our flips in south Florida. the cheapest we're getting a deal (if it's a deal) is in the upper 200's. And that'd have to be quite the distressed property. I could utilize 100% of his funds to fund the purchase and the rehab, but that would leave his margin for ROI really low. That's what I'm trying to work around. I like the idea of leveraging his cash with a hard money lender allowing me to do more deals and yield him a higher return on his money since he'd have less invested in each deal. I am trying to zoom out and look at the annualized return as much as possible, I think that's the big selling point for him.