Private money lender wants to partner up. Now what?

Question

I found a great deal recently which attracted the attention of a private money lender whom I know and trust.

She wants to go into a house flipping business with me. She would provide all the money and I would do all the rest including deal finding, managing rehabs etc. She has enough money that we can do multiple deals at once which is attractive to me because I would only be able to do one at a time at this point. We haven’t agreed on a percentage. What do you think? Is it reasonable to ask for more than 50% of the profit? Finding deals in my area requires a lot of marketing and driving for dollars and my time is valuable since I’m currently working and raising a family. Seems like a fantastic opportunity but I would appreciate your advice. Thank you.

Will Barnard · Answer

Finding the deal, funding the deal, and managing the deal are the three main factors in any deal. I weigh the finding and money as the two heaviest. Based on your info, I think 50/50% is fair here with the understanding that any marketing costs associated with finding the deal are part of the equal expenses and don’t reside with you alone. The fact you can do two at once rather than one on your own and have zero money into the deal is a huge benefit. Asking for more than 50% may make the other side feel less appreciated and thus create problems down the road.

Ask yourself this, if you were loaded and funded 100%, would you want less than 50%?

Daniel DeSurra · Answer

Thank you Will. Great advice! I just checked out the photo links to your flips. They look fantastic! Congrats on your success and for taking the time to respond to my question.

Brian Pulaski · Answer

Doing more than one at a time was the reason I went into flipping full time. I had 3 houses at once and my 9-5 job suffered. It worked out for the best but it was a lot more demanding then I thought and juggling it all didn’t work. Good luck with it no matter what you end up with!

Kenneth Garrett · Answer

@Daniel DeSurra

Private lenders are partnered either through an equity partnership where it is typical to share 50/50 in profits and losses. The private lender can also be a debt investor. You pay an interest rate for their money. In my area it is typically 12% and 2 points. You will need to set up a note and a mortgage or deed of trust depending on your state. Have a lawyer draw up the documents to protect both of you.

Daniel DeSurra · Answer

@Brian Pulaski

Good point Brian. It seems like a 50/50 split would be fair. It really depends on how many deals I can find in this tough market. I can easily do one at a time on my own and fund the purchase and rehab. If I can expand my direct marketing campaign and get more deals under contract then partnering up will be a great opportunity. That being said, managing more than one deal at a time may be more stressful with my limited time. I do have the option of cutting back at work since I’m self-employed as a medical practitioner.

Brian Pulaski · Answer

@Daniel DeSurra one thing you posted pops up a red flag. You want more than 50% because your time is valuable due to a full time job and raising a family. As someone who flipped houses while holding a full time job and raising a family I wouldn’t go in there asking for more percentage that way. She may see it as you don’t have a lot of time, and the project may drag on because of it, and on top of it want a premium because of that...

Daniel DeSurra · Answer

Thank you Anthony and Kenneth for the excellent advice.

Anthony Dadlani · Answer

@Daniel DeSurra Each partnership obviously is structured different, however can describe what we have done.

If the working partner is providing some capital ( a small amount) we do a 50/50 split. If we are providing all the capital we do a 60/40 split.

Understand that your investor is taking all the financial risk in the latter. Building a relationship with a capital partner is essential to success. You will be able to take on multiple projects and grow quicker. It’s certainly worth making less per deal but more over volume and time in my opinion.

Best of luck in all your endeavors.

Mary K. · Answer

@Daniel DeSurra what are her loan terms? Is she charging you interest or is no interest or payments taken?

It sounds like she is also providing experience and business knowledge which are actually worth their weight in gold. If you think she is good at evaluating deals and running the numbers side that is a pretty key contribution to the success of the flips.

You could do one or 2 flips with her and then reevaluate what split is worth it to you.

Private money lender wants to partner up. Now what?

Private money lender wants to partner up. Now what?

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