Private lender equity structure for flipping

[Tripp Wylie]

Me and two other partners are flipping houses locally and are using a local individual for the financing. We’ve done a few deals to prove things out and so far so good.

The structure has been we are loaned the money at 0% but the lender is getting a big chunk of equity. Deal #1: 70%, Deal # 2: 50%.

The lender is using a line of credit at 8%, so he does have interest expense, but not passing that on to us.

Really my question is, what’s a long term structure that makes sense for both sides?

Lending at 0% is great but is 50-70% too much equity per deal?

Is there a structure that makes more sense?

Should we offer preference and less equity?

Thanks!

[Chris Seveney]

Quote from @Tripp Wylie:

Me and two other partners are flipping houses locally and are using a local individual for the financing. We’ve done a few deals to prove things out and so far so good.

The structure has been we are loaned the money at 0% but the lender is getting a big chunk of equity. Deal #1: 70%, Deal # 2: 50%.

The lender is using a line of credit at 8%, so he does have interest expense, but not passing that on to us.

Really my question is, what’s a long term structure that makes sense for both sides?

Lending at 0% is great but is 50-70% too much equity per deal?

Is there a structure that makes more sense?

Should we offer preference and less equity?

Thanks!

 Find a private lender who charges you 10-12% plus points. you keep all upside but take on more risk.  I would still consider 0% for 50% of the deal but maybe not 70% - you have to run the numbers and see what your anticipated profit is and is it better once you factor in risk to give up equity or get a loan - and what would that loan need to be to be beneficial.

So if you give up 50% - If i did a 15% loan I am still better with the loan? That is an example.

[Jacob Sherman]

every joint venture is different . How much sweat equity are you putting in from your side ? handling the whole transaction start to finish ? 

[Tripp Wylie]

@Jacob Sherman that’s correct. Me and other partners handle everything from sourcing, managing rehab and sale.

[Tripp Wylie]

@Chris Seveney very helpful, thank. Yes, need to do the math to be sure. 0% for max of 50% could make sense. But need to do the math on what straight lending looks like, and keeping 100% equity.

The quick access to capital is obviously huge for winning deals on terms, closing quickly.

[Max Ferguson]

As @Chris Seveney said, it's time to pull out the excel speadsheet to figure the whole thing out. With a calculation being on a deal by deal basis you'll need to go in depth with costs VS profit with both scenarios and timelines. 

Either could make you more money but dependent on market conditions, location, timeline, roadbumps, rates, etc..... 

Good luck and let us know what you figure out!

[Julie Muse]

I think 50/50 is fair if they are funding the deal. Just keep hammering out the deals until you have saved enough to fund yourself. 

[Crystal Smith]

Quote from @Tripp Wylie:

Me and two other partners are flipping houses locally and are using a local individual for the financing. We’ve done a few deals to prove things out and so far so good.

The structure has been we are loaned the money at 0% but the lender is getting a big chunk of equity. Deal #1: 70%, Deal # 2: 50%.

The lender is using a line of credit at 8%, so he does have interest expense, but not passing that on to us.

Really my question is, what’s a long term structure that makes sense for both sides?

Lending at 0% is great but is 50-70% too much equity per deal?

Is there a structure that makes more sense?

Should we offer preference and less equity?

Thanks!

Now that you have proved things out and have a track record you should be establishing other sources for your loans. In my opinion, you should have at least 3 potential lenders. With the other sources in place you may be able to negotiate a better deal with your current lender.  Don't start negotiating with your current lender until the others are in place.