If I Partnered with a Flipper Would this Scenario Work?

[Rich Dunmore]

I'm in the education stage of Real Estate Investing and still trying to put my strategy together. I'm pretty set that I want to buy and hold in order to get a sustainable cash flow but I'm also intrigued with the BRRRR strategy.

The concern I have with the BRRRR strategy is I've never rehabbed a house before and don't know what I don't know. So my thought was to partner with an experienced flipper until I can get a couple under my belt.

This is the scenario I've run through my head.  These numbers are theoretical just to see if this would create a win-win.

SFH Purchase: $60k Rehab Costs: $20k After-Rehab Value of House: $110k

Flipper would purchase the house (non-convential loan or cash) and I would kick in $10k for down payment.  He has $50k in and I have $10k in at this point.  

Flipper pays for rehab so that puts him at $70k

After rehab the house appraises for $110k so with his $70k and my $10k that we have into the house there is $30k of forced appreciation that we would split 50/50.  I would obtain a conventional loan  and pull $88k out of the house, giving the flipper $85k and he walks away.

Again, making assumptions that I can rent the house for $1300. Taking property tax, insurance, vacancy, CapEx and maintenance, and other expenses into account let's assume I achieve a cash flow of around $200. This would give me a Cash on Cash Return of about 9.5% and a total first year return of 104%.

I know its not an ideal BRRRR because I can't my $10k down payment out but I do get $22k of equity for a $10k investment and a property that looks like it cashflows decently. The other positive and more importantly at this stage of my career, I have someone with experience as a partner for the rehab portion of the project.

Looking at it from the flipper's point of view, he gets some help with the initial investment, a $15k profit and quick exit strategy.  Is that enough for him to get excited by a deal like this?

[Jen R.]

I would think that in order to split the profits 50/50, you would at least need to put up half of the initial investment, and probably more to counter the value of his expertise. Why would the flipper, in this case, want to take your $10k to give up half of his profits? He is providing 90% of the funding, and 100% of the knowledge. As someone who has rehabbed houses, I would much rather take out a loan to complete the rehab than take on a partner (which can be a headache) and give up profit. A better option for you might be to connect with someone who is successfully completing the BRRR strategy and ask if you can tag along on their next project. Perhaps you could offer some labor in return for the privilege of watching the process (demo, painting, landscaping, etc.).