Flipping with an Investor

[Nick Coons]

I'm looking at increasing my deal volume by bringing in an outside investor for house flipping. The target would narrowly be SFHs needing cosmetic repairs (i.e. flooring and paint), can be rehabbed in less than one month, then sold. A sample deal might look like this:

- Property purchased for $300k.
- I put in $10k for the earnest deposit.

- The investor puts in 15% down on HML ($45k minus my $10k deposit, $35k).
- $15k for materials cost, paid for by the investor.
- $5k for labor, paid for by me (I have a W-2 crew).
- $5k in holding costs, paid for by the investor.
- Property sells for $400k.

Funds are dispersed accordingly:

- $255k to pay off the HML.
- $55k back to the investor to recoup his investment.
- $15k back to me to recoup my investment.
- $40k in closing costs (assuming 6% seller commission plus seller-contributed closing costs).

Net: $35k. $17.5k profit to the investor with a 50/50 split.

(Let's put aside for a moment whether it's realistic to buy a property for $300k needing only cosmetic repairs and selling it for $400k.. I know my market, and I know the deals my wholesaler brings to me, so let's assume it is).

In the end, the investor nets $17.5k in a couple of months with an investment of $55k. The specific people I'm targeting as potential interested investors are people that know me and have worked with me (but not in this capacity) for 20+ years.

As I've always gone at it alone and have never brought in an investor like this, I'm curious what I might be missing. My plan is to write up a document describing the process. This would include how the deal is acquired, who is responsible for administering the purchase, to whom the property will be titled and how the investment would be secured, what a sample deal might look like, who makes the decisions before, during, and after the purchase, and what threats exist that could derail the process (market changes, supply-chain issues, etc) so that it includes a realistic picture of possible negative outcomes.

[William Harvey]

@Nick Coons it sounds like you've been thoughtful about how to structure this, and at quick glance it makes sense. You're essentially looking for an equity partner that'll share in the upside with you. As opposed to a debt partner (hard money) that gets a fixed amount and doesn't share in the upside. You give up some upside, but you also have less downside risk. Makes sense. 

I would think the best way to do it is to have a set agreement with someone (ie. John Doe) and form an entity that you both own 50/50. This entity (John and Nick LLC) would then own the property, and all profit/loss would flow through this entity to you and the investor. If you spell this out and show all the different scenarios for how this could turn out (good, bad, ugly) then I think it makes perfect sense for an investor to do something like this.

One thing to think on is the capital contribution from the investor. If I were you, I would structure it where the investor is putting up all the equity needed, as opposed to piece mealing it as you described. If you want to show "skin in the game" to the investor, show them how you sign a personal guarantee for the hard money loan and that should be enough to show that interests are aligned. And if they know you well like you mentioned, then they likely trust you already and this isn't necessary. You're contributing the "sweat equity" and the investor contributes the capital. Simple as that. 

Also, one thing I thought of as I'm typing this is to figure out how much the investor will commit to this. I'm assuming all decisions will be made by you regarding whether to move forward with a deal or not. If this is the case, you essentially want a pool of money that you can tap at any minute. If this is not clearly defined, the investor might get cold feet. But if they commit it ahead of time and sign something stating so, then you know that money is available. How much they commit depends on what each side is looking for, but if you get someone to commit $150k or so, that should get you through at least 2 deals at the same time based on the numbers you wrote down. Hope this helps!