What Is The Best Way to Start Flipping Houses and Raise Capital?

Question

I’m looking to get started in the fix-and-flip business and have a few questions. I have a couple of funding options on the table and I’d love to hear your thoughts:

• Funding Approach: I have capital partners who are willing to fund 100% of the project in exchange for 50% of the profits. Alternatively, I could explore hard money lenders. What would you recommend for someone just starting out? Should I stick with my partners for the initial flips or go the hard money route? I’m asking because I plan to eventually scale and get into multifamily syndication, and I know learning to raise capital will be a crucial skill.
• Scaling with Private Lenders: Once I’ve done a few flips, I’m thinking of finding a group of private lenders to help me scale the business. Do you have any tips on how to approach and structure deals with private lenders for scaling?
• LLC Structure: For the LLC structure, would it be best to create a new LLC for each flip, or should I just create one LLC that handles all of my flips? I want to be sure I’m structuring things in a way that protects my assets while allowing for growth and still keeping money partners protected.

Any feedback would be awesome.

JD Martin · Answer

If you have found people willing to lend you - someone with I assume no experience doing this, since you're here asking the question - 100% of the costs of such an endeavor for half the profits, you have found a gold mine and should look no further. However, you should think hard about the relationships and agreements/contracts you have with these partners should things go south, as they very often do for new anybody-anythings. Are they family members? Close friends? Or just strangers off the street you met at a REI group?

Beyond that, forget about the LLC. You don't have anything to take I assume since you don't have anything to put into the project. That's just wasting time and energy right now.

If you manage to get this off the ground and do some verified - meaning paperwork is in your name, or company's name, etc - projects that turn a profit, and you build some capital in a bank, you should be able to go right to that lender after a year or two and start a relationship no problem.

Chris Seveney · Answer

I agree. If you have someone funding the entire deal, you have ZERO risk in the deal and get 50% of the profits - run with that.

Lets look at it another way. Lets say you buy a property for $200k and put $50k into it and then net $300k which is 20% profit. You made $25k.

In a Hard money / lender situation, you are gonna be putting $50k into that deal, they lend you $200k and charge you 12% and 2 points. Lets say it takes six months  - you just spent $16,000 in lender fees and your $50k you could have invested elsewhere for another $5k. So you are giving up $21k.With your current situation you are giving up $25k and have ZERO risk. This is an absolute no brainer.

Ryan Blake · Answer

@Christopher Lynch It has already been said but the 100% funding for 50% profits is likely your best option. Even in the long run. It will allow you to grow with little risk and no capital. Hard money can help but I don't think it is right if you truly have this option (this is coming from a hard money lender). You really have a great position here.

If your private money runs out or runs tight, then you can explore other funding options like hard money. Keep that as a backstop when the primary funds run out so that you don't have to pass up on a great deal that comes your way.

LLC structuring is something that you really should talk with a tax professional about. It will depend on where you are doing your deals and what the liability is that follows you after a sale. Most new construction deals require you to give up to a 10-year warranty on some items while most fix and flips come with very little extended liability after the sale excluding gross negligence which is not stopped by an LLC in any case. I am not a tax or legal professional so please take this to someone much more qualified.

Randy Rodenhouse · Answer

@Christopher Lynch. When starting out it’s a pretty good deal for someone lend you all the money and you give them 50% of the profits.  However, after you get some experience, you probably want to get a Private Lender since this will allow you to keep the majority of the profits.  I do a lot of private lending and we do make some passive interest, but the good fixing flippers make the bulk of the money.  With respect to the LLC, you can continue to reuse the LLC since you’re not keeping properties in the LLC. However, if you start holding properties in an LLC, you don’t want to flip properties in the same LLC.  Technically it would be best to get a C Corporate or S Corp. to flip properties and since you are considered a dealer if you do several properties a year and this could have negative tax consequences in an LLC.

Griffin Malcolm · Answer

1) If you've got guys willing to front all the money while you gain experience and make some money then that's a no brainer. You can stack your personal 50%s up for separate ventures while still knocking out deals without your own capital

2) Read Raising Private Capital by Matt Faircloth

3) One LLC with the S Corp designation to pay yourself a reasonable salary from the flip profits. Can setup a solo 401k as well for further sheltering

James Hodgson · Answer

Even with 100% of funding, who gets to make expense and design decisions? I worked with this exact system but the investors wanted outrageous requests along with constant changes that made the project unprofitable. They have the money so they get to make the choice. Regardless if it pencils out or not.

If either you or the investors are not highly experienced, this system is very very difficult to slow the first couple flips profitable.

Only way I would ever do it again, is if that contract is written much more carefully and explicitly. Alternative route I chose, I will leverage my duplex (purchased 4 years ago) equity through house hacking to have skin in the game on next flip. Good luck!

Zachary Deal · Answer

As others have mentioned the ability to gain experience without risk is very valuable even if you are not making the profit you would like. Once you have a project or two under your belt you can either renegotiate terms or go out on your own. Lenders really value experience for fix and flip and BRRRR investing (especially experience in the same general area). You will be able to get higher leverage, better rates, etc once you have more experience!

Peter Mckernan · Answer

This is a solid start for the capital partners willing to do the 100% fin and then 50% on the profits. When you start to do a lot of projects, 50% is a lot of money to go out when you are scaling, finding deals, and doing all the other footwork. There are a lot of pieces that go into the deals and giving someone a percentage of profit will start to become less of a value than what it was at the beginning.

Money now is very good because you are new and ready to do all the work, but the examples you'll hear about are people posting on BP saying, "well, I did all the work and they got a lot or most of the profit." This is when the tables turn to you restructuring the contracts you have with them or really going out on your own completely. JD made some solid points on structuring the agreement etc.

Sofia Komrskova · Answer

If you found somebody willing to lend the full 100% in exchange for 50% even though you have no experience then you've got yourself a unicorn. There is no better situation or opportunity to be in than that. You are basically saying somebody is willing to front the entire risk while you keep 50% of the spoils. Learn how to find off market deals and good contractors. Delegate the rehabs to them and then get the properties sold. If your lender has some money floating around send me a dm too :)

What Is The Best Way to Start Flipping Houses and Raise Capital?

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