Flip Partnership Strategy - Good idea?

Question

Hi!

I haven't seen anyone do this yet...

I have a friend who wants to be my cash partner. I have some real estate experience but would like some more guidance before tackling a full blown flip, especially with someone else's money.

I figured I would make an equity partnership where my cash investor gets 50% and puts up 100% of the cash, and I bring in an experienced flipper who gets what otherwise would be my 50%, in exchange for mentoring me through the process.

My friend gets the security of a seasoned professional handling his investment. The flipper gets an infite ROI and has a financial stake in making the deal profitable. I get the knowledge and experience to do the next deals myself.

Can you see any pitfalls I don't? Our next REIA meeting is in two weeks and I know flippers will be there!

Julian Sibley · Answer

@Rachel Luoto Why not find another flipper at your REIA and offer free labor if you feel like learning from other's mistakes? If you don't want to offer free manual labor ask them what they need help with, or something they don't like to do. That way you see their project from start to finish, and can see their process, but they also receive something of value in exchange. Then save your flip deal for yourself to make some money. I would second what was previously mentioned, if you want a professional to do the work why not just hire them to do the work and you manage the project/receive some of the profits.

My other thought, if I was your capital partner and I was putting up all the cash, I would want more than 50% share of the profits. I don't know the relationship between you/your friend but that's just my $.02

Mateusz Prawdzik · Answer

Depends on the asset. If it's a single family, it's better to just sell it, if there are units there that can be rented, Refi out can be an option. I don't know what the business in Washington is like, but in NJ I always look to sell out of a single family and even most of the time out of a multi family too.

In terms of strategy, I would do a 50/50 with your friend, you're the managing partner and he is the capital partner. Have a draw schedule in place and have a plan. If you want to connect with me and ask me questions on the process from start to finish, feel free to do so. I will tell you where you're right and where you're wrong.

And as much as I want to believe that you do learn better from others mistakes, I think that's a bunch of bull. Nothing is better experience that learning by your own mistakes, because "insanity is doing the same thing and expecting different results," so if a mistake is made, chances are you wont repeat it .

Mateusz Prawdzik · Answer

@Rachel Luoto This is a great idea but it doesn't do a SINGLE thing for you, so in turn it's not that good of idea. Your head is in the right place for sure, but think of it this way, you are doing everything the more experienced investor is saying to do, which causes you not to think for yourself and learn the hard way. You're giving up your whole 50% so you're doing 6 months of work and make nothing... no offense but if you don't trust yourself to do a project, I wouldn't take other people's money to do a project. If you're lender is willing to take the risk of financing it, I think you should take the risk and build up the courage to do it yourself.

Also what Chris said does make sense, if you are going to give up everything and not make a dime you might as well make something and just have the experienced flipper do the work for you and take some equity and managing fee.

But honestly, the best way to learn is to do it yourself and screw up  so you have mistakes that you can learn from. I've done it and I am in a great position compared to everyone that did what you are planning to do.

Rachel Luoto · Answer

@Chris Seveney thank you for the input! What I had in mind was more along the lines of me doing the work, but using my 50% as a sort of "fee" to pay an experienced flipper for their mentorship in finding and analyzing deals, learning how to manage a project and contractors, etc. I'm not sure how else I would incentivize an experienced flipper to give me the level of mentorship I'm looking for.

My cash partner would know that's our plan from the beginning - he is an entrepreneur who at one time had a multimillion dollar construction business, so we aren't playing with grandma's retirement money here :)

I've got J Scott's books I've started reading through, and have been listening to the podcasts and connecting with my local REIA contacts. We will get started in about 6 months, so that is our lead time to get a clear, documented structure and meet with a lawyer and tax strategist.

Rachel Luoto · Answer

@Odie Ayaga thank you! I do have a great GC and a great agent in my area. I know a few flippers at my REIA but not well. I'll keep studying and listening to podcasts to get more comfortable with doing the process by myself :)

Odie Ayaga · Answer

@Rachel Luoto I would say if you already know an experienced flipper or discover one organically that engenders your trust I don't think it's a terrible idea to use that relationship to gain some experience by potentially setting up a deal like the one you laid out. However, I don't think I'd go looking for someone you don't already know since you're now adding the complication of finding someone trustworthy to deliver for you and your partner that you've never worked with before. In that case you might as well instead search for a GC that seems trustworthy and if they don't work out at least you gain the experience of discovering what to look for in one going forward.

Julian Sibley · Answer

@Rachel Luoto sounds like you answered your own question. If you're an underwriter by trade you understand the process well, but you want to see another flippers process from start to finish. I would avoid the term "mentor" and tell people you are looking for a "partner" (more of a give than a take), what you have to offer is expertise with numbers/management/relationships, a capital partner, and potentially manual labor from your boyfriend Julian.

If you are alright trusting your strengths, and can't find a flipper that is looking for a partner, I would just finish out your team. Find a good general contractor, and an agent, and do the deal yourself. Your boyfriend can do manual labor on minor jobs, you and your capital partner make a good profit, you will build a relationship with your contractor, and you will certainly learn from the process! The thing with a "normal split" for profits is that you generally want to make your capital partner happy so that they will fund your future deals, everyone will have different numbers for what kind of return they want to see with their capital, you just have to sit down and ask around their expectations.

Rachel Luoto · Answer

@Julian Sibley thanks for the perspective! I'm not great at the manual labor part, my boyfriend actually handles most of that (whose name also is Julian!). I'm an underwriter by trade so the numbers/management/relationships is why my strengths lie. I do like your idea of partnering on a flip and leaving the money partner out for now.

I hear you about the 50%, it's hard to find a consensus on what a normal split is - I just heard 50% on one of the podcasts recently. I'd be willing to give more - a portion of a good deal is better than 100% of no deal :)

Rachel Luoto · Answer

@Mateusz Prawdzik Thanks for that, I guess I'm just scared to tackle it on my own! But I guess I always have you all on BP :) I've always been the kind of person who learns from other's mistakes rather than making them myself.

What would you suggest as an alternate strategy to partner? Just do a JV 50/50? I'm also considering doing a BRRRR type model as an exit strategy instead of flipping (multiple exit strategies)

Flip Partnership Strategy - Good idea?

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