Need advice after randomly meeting a potential private investor

Rehabbing & House Flipping
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Need advice after randomly meeting a potential private investor

Brian H.
Carolina · Member since 2017 · 519 posts · 222 votes
Hey folks, Hope all is well with everyone else here. So I was helping a friend of a friend deliver some mattresses the other day (he owns a mattress store) and we had a good bit of time to talk. He sounds potentially interested in doing some property flips with me. I have one successful flip under my belt and 11 rental units that are profiting well. I am looking for advice as to how to structure this or lay this out? Just never worked with anyone besides myself. It would be basically where he provides the funds and I handle the flip(s). He seems to want to be partners in this. Is that better than trying to work with him as a private lender? If you have done this, how do you structure it? Would it just be a 50/50 split since he doesn't have to worry about any of the legwork? Or should he get more of the pie since he is risking his money? Never had to even write a business proposal before... and that was what he mentioned. "Write up a business proposal and we can talk about this." Or, should I approach it with him as the private lender? What percent are private lenders getting in this climate? That seems easier and less risky for him since then he is the first lien on the property, right? But then he stands to potentially make less? Or could I, with him as lender, offer a sort of structured rate of return based on overall profit instead of payments/interest but still gets first lien as well? Any information any of you seasoned flippers could offer me would be so greatly appreciated. Been Googling for a few hours but find so many different opinions. Figured I'd come here and ask the pros. Thank you!!
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  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    5y

    Assuming you have experience with flips?

    I'd divide the proceeds by capital contribution amounts, however, CHARGE the partnership for ALL of your work to make it happen.  He contributes money vs you contributing sweat, but they both make it happen.

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  • Greg Dickerson
    Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    5y
    Originally posted by @Brian H.:

    Hey folks,

    Hope all is well with everyone else here.

    So I was helping a friend of a friend deliver some mattresses the other day (he owns a mattress store) and we had a good bit of time to talk. He sounds potentially interested in doing some property flips with me. I have one successful flip under my belt and 11 rental units that are profiting well.

    I am looking for advice as to how to structure this or lay this out? Just never worked with anyone besides myself. It would be basically where he provides the funds and I handle the flip(s). He seems to want to be partners in this. Is that better than trying to work with him as a private lender? If you have done this, how do you structure it? Would it just be a 50/50 split since he doesn't have to worry about any of the legwork? Or should he get more of the pie since he is risking his money? Never had to even write a business proposal before... and that was what he mentioned. "Write up a business proposal and we can talk about this."

    Or, should I approach it with him as the private lender? What percent are private lenders getting in this climate? That seems easier and less risky for him since then he is the first lien on the property, right? But then he stands to potentially make less? Or could I, with him as lender, offer a sort of structured rate of return based on overall profit instead of payments/interest but still gets first lien as well?

    Any information any of you seasoned flippers could offer me would be so greatly appreciated. Been Googling for a few hours but find so many different opinions. Figured I'd come here and ask the pros.

    Thank you!!

    Partnerships can be difficult. The easiest cleanest structure is to offer him the opportunity as a private lender. He will get a note and deed of trust to secure the investment in exchange for a preferred return percentage you agree on. Typically right now 8-10% is sufficient. You will also get insurance on the property as well so the investment is fully secured and insured. 

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  • Brian H.
    OP
    Carolina · Member since 2017 · 519 posts · 222 votes
    5y

    @Steve Morris  I have done one flip but learned an incredible amount. Before even approaching the idea of doing a flip I had spent about two years on here as well as reading probably 10 books on the topic. That doesn't make me anything close to an experienced flipper, I know.  I just want to make the point that I have taken the time to educate myself as much as possible and also have some good realtors in my pocket to help me figure out which properties make the most sense as flips.  I don't do the actual labor, I find a deal good enough to pay people to rehab it and still make a profit. But I would be handling ALL of that. Contractor/sub-contractors, realtors, issues that arise, etc.

    Thank you for taking the time to respond!

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  • Brian H.
    OP
    Carolina · Member since 2017 · 519 posts · 222 votes
    5y

    @Greg Dickerson So, I was thinking maybe this would be the best route as well. So even with rates as they are with banks and mortgage lenders, it makes sense to still pay 8% - 10% to the private lender? Not against that, just surprised they still are getting such high rates. Is this specific to private lending on flips?

    The insurance... you mean property insurance? Or some other kind of insurance that will make this safer for the investor?

    Thanks for the response! :)

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  • Katie Neason
    Flipper/Rehabber · Bryan, TX · Member since 2014 · 258 posts · 170 votes
    5y

    It can be done either way. Best for you is a loan because it will likely be less expensive and cleaner. When we bring money in on equity deals, I like to structure them as 1/3, 1/3, 1/3 for money, bringing the deal, managing the rehab. So if he has money and you find the deal and manage the rehab you would get 2/3 and he would get 1/3. 

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  • Kerry Noble JrPro Member
    Investor · Indianapolis, IN · Member since 2018 · 2k+ posts · 1k+ votes
    5y

    I usually give anyone a 8 to 10% return on their money for using their capital and I manage the work

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  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    5y

    @Brian H., when I used outside money, we split the profits 50/50.  Equity side gets 1/2 the profit, project manager gets 1/2 the profits.  Often times, my wife and I managed, and had cash in the deal, so we got in on both sides.

    Fortunately, or unfortunately, there are infinite ways you can structure it. A lender is easier as there is known expense and if you do well, you get more profit, while the lender gets security and generally known returns.  But even this structure, you can let the interest rate accrue over the term and pay off the lump sum upon sale, you can pay monthly interest payments (this is the most common), or some combination of the two (pay 4% interest during the hold and bring to a cumulative 8% return at sale).

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