Profit split in a SFR flip as only a money investor

[Ryan Rogala]

I am considering investing with a friend who actively flips single family homes. He states that he would look for a minimum of $20,000 investment in order to take on a partner. As I am new to the industry and working with him as a partner, I’m looking to come in low at $20k-25k. He is a part time realtor and has all of the connections (contractors, lender, etc.) and would organize the execution of the flip. I’m very handy and am offering to chip in wherever needed to reduce contractor costs alongside him.

What type of profit split would you consider fair in this scenario? (50/50, 30/70, 15/85 etc.).

I’m assuming this is contingent on price of properties. Have not looked into available deals for purchase, but homes in our target market that were recently flipped tend to sell in the $250-300k range.

Before starting to browse this community, I assumed it’d be a ratio of my portion of the purchase price ie. 20k/150k= 13% Since that would be proportional to my share of the cash liability on the flip investment. However, after reading more about how you can flip properties with little to no money down through other borrowing avenues my potential partner may have very little cash tied up in the flip himself. Does that mean I am in a position for a larger percentage?

If I am way off base please tell me. Just figured it was a question worth asking now so I’m not kicking myself when I find out I left money on the table later.

[Aaron Pfeffer]

The profit split ratio you seek is contingent on how much of the "money" you actually are. As in, is your $25,000 covering the down payment for the first lien financing of the flip and also the rehab portion? If that is the case, then you are the "gap lender" and should be getting 30-50% of the net proceeds. Or is your money just being used as the debt service of whatever loan he is getting, so he has skin in the game himself? That could be more like a 10-15% return. Or are you just the rehab money? Maybe 20-25% net profit to you then. Whatever you are, even more than what you're making, you want to secure your lien appropriately. Create a note, record a DOT, get the appropriate title insurance and make sure you are listed as a loss payee on the hazard insurance. And if your money is being used for the rehab portion, then you should be doling it out in draws, most likely as reimbursements for money he personally spent first.

@Eric M. made some great points too. Dreaming of your profit splits is cool and all, but making sure you protect your money at all costs is way cooler. These types of small JV deals can go awry very quickly if you're not careful.