Bringing on a partner with financing available or going it alone?

Question

Hey Everyone!

I'll try to make this short but I have a dilemna on my hands.

I would LOVE to flip houses for a living. I probably watch more HGTV than any other male 24 year old on the planet. With this in mind, I am looking to get started while keeping my current full-time job.

So I'm in a unique situation at the moment. My landlord also wants to get into house flipping with me (he is a few years older than me). While he has become a close friend I don't think he is actually passionate about flipping but really just wants the extra income. However he is a good worker and understands finances better than most our age.

This landlord happens to have a well-off father. Enough that he would be willing to lend us 300k in return for 10% back on that per year. Obviously I am not likely to find financing like that just starting out even with great credit. He would like each of us to put at least 20k down (which we can both do) for each 300k loaned.

Of course that this means while my landlord and I would split the work (which we plan to do some of ourselves) and responsibilities we would also split any profits. We both work flexible schedules so between the two of us we could be available any day if needed. Also, his dad is well off enough that even if we didn't get any return for him it would not affect their relationship (although he might be more reluctant to loan in the future).

What would you guys do in this situation?

Robert Williams · Answer

Hi Jon,

Go for it!!  The biggest challenge most first-time flippers have is getting the cash together to do a deal.  You've got that cash being provided to you at a very reasonable rate (most hard money lenders would charge you a LOT more!)

Just make sure you do your research on any deal before pulling the trigger.

Jordan H. · Answer

I don't understand the terms of your loan. A down payment on an unsecured loan doesn't make sense to me. You're not borrowing $300k at 10%, you're actually borrowing $260k at 11.5%.

Regardless, once you get the cash, you're not tied to making all cash purchases. Assuming the property qualifies for a loan, you could simply use the cash as a down payment on a "short term" mortgage, like an ARM. This leaves you plenty of cash to renovate.

Tim Little · Answer

Hi Jon,

I understand your pain as it relates to DC prices. I bought my primary residence in DC but found that it was a little too inflated to be a good setting for the start of my real estate investing endeavors. Until my pockets get a little bigger (pun intended), I'm looking at Baltimore and Richmond. My strategy though is buy and hold for multi-families.

I will say that with a budget of $300k, there are still some good flip candidates in DC East of the river (Ward 7 & 8). The fact that you would be coming in with a cash offer might also provide some leverage. I would recommend skewing high in determining your flip budget though. Row houses, for example, will likely require some walls coming down to provide the open concept layout that a lot of buyers today will expect. As long as the numbers make sense though, I wish you the best of luck. Let me know how things turn out.

James Wise · Answer

You definitely need to know what your doing when using someone elses money. Using someone elses money for a 1st attempt is USUALLY a bad idea.

HOWEVER

I say go for it. Do your research and make sure to tackle something you think you can handle.

The father knows that neither of you have done this before and is willing to take a chance on you both, mostly I assume to help his son get a leg up in life.

You can use this money and then eventually develop a track record and be able to bring in other investors whom you do not have such a personal relationship with.

Jon M. · Answer

Hey Ron,

Thanks for the advice and that is definitely a smart place to be cautious. Our only real problem is that even with decent cash reserves for our age there is no way we could purchase anything in the DC area without financing of some kind. We likely won't take him up on the offer of 300k the first time (if we do go in together) and are even considering trying Baltimore or Richmond in the future but for now we don't think having our first flip more than 20 minutes from our place is a good idea and that means 300k+ purchase prices.

Ron Averill · Answer

I tend to be much more careful with other people's money (OPM) than my own. Relationships are simply more important than money.

Since you are new to flipping (except for your HGTV education), I would suggest starting small with a project that uses mostly your money and your landlord's money. Use the father's money very sparingly while you make all of your first-timer mistakes and build some experience and a process.