How much capital needed to be equity partner for fix and flip?

Question

Hi,

I was wondering how much capital would be needed to become an equity partner for a fix and flip investor?

I have read thru old threads and was having a hard time coming up with an answer.

Also, if you couldn't supply the complete amount needed for the investor would there be a partnering structure that would work where in order to learn, you could offer them capital at a better rates than hard money rates?

I was just wondering if this made sense. Thanks.

Ann Bellamy · Answer

I just re-read @Karen Margrave 's post, and I think in retrospect she was asking me to talk about different ways to lend, as opposed to different ways to supply funds with a particular investor.  If so:

In California, there are specific rules and laws in place that so that brokers can sell fractionalized notes (an investor can invest in part of a loan) and there may be other states that have similar laws.

If you find a broker who works on hard money or investor loans, you should ask them how they structure deals with investor money.  Also, most hard money companies are lending out money they have raised from other people.  Some of them pool the money, and some of them form single purpose entities, and some of them close in their own name and assign the note to the investor afterwards.  Some are lending out their own money, and some are lending out a combination of their own and other people's money.

Whether you lend to an individual investor, or you lend to or through a hard money company, you should have your attorney review the documents.  The reputation of the company or person is critical, and if I were you, I'd value that over the return expected.  It's much better to get your capital back with a lower return than to expect a higher return and get only part or none of your capital back.  @Dustin H. 's comment has a great deal of truth to it.

If you decide to become a lender to a particular investor, you should find a real estate attorney in the state where the property is who is very experienced with private lending transactions.  Don't do any of this without counsel.

Dustin H. · Answer

Be aware that in real estate, if two partners get together, one of which has the experience and the other has the money, at the end of the deal, the roles are usually reversed. :)

Karen Margrave · Answer

@Taylor Green If you are inexperienced you need to use caution. As to the amount, it depends on the area, housing prices, work needed, etc. If you have money you'd like to earn interest on, you might want to find a reputable broker and use them to make loans. Also,@Bryan Hancock sometimes  has deals he needs investors on and might be able to steer you in a direction of structuring deals, etc. You might also get some feedback from @Ann Bellamy

Taylor Green · Answer

Sarah, thank you for sharing that with me.  That was very helpful!

Ellis San Jose · Answer

Partnerships happen when :

1) You have the amount of money and/or expertise that an operator needs at the right time.

2) The terms are superior to the operators alternative sources of capital.

Sarah B. · Answer

I work with silent investors who provide the capital for 100% of the project. I do all the work and locate the deals, determine ARV, estimate rehab, fully scope project, design the rehab, manage the contractor(s), pick finishes, manage timeframe, budget, etc.  I split profits with investors 50/50.  Investor who want to invest with me in the Northern California market need around 200-250k.  You can invest with less, it depends on the current market and competition.

I think the amount depends on your market and what price points the investors you meet are investing in.

Taylor Green · Answer

Thank you for the responses!

Dustin that is a great line!

Karen, thanks for getting people involved in the conversation.. How would I go about finding a 'reputable broker'? Is it as simple as finding a lending broker and then giving my money to them to loan out? What are the standard returns you get back on the money?

Anne, thanks for the detailed response. I had no idea there were so many different ways to lend out money.

The average investment of the flippers in this area seems to between 175k-300k.

If I were to provide 'all of the money' does that mean I'd supply the entire purchase price, including the down payment, and the entire amount of the rehab costs? If so, what type of partner split would be reasonable? 50/50?

If I were to provide only the down payment, what type of partner split would be reasonable?

What would happen if I only had 300k to lend and the costs went higher than 300k on the project? Would the investor be able to use another financing source?

My original plan was to find an investor to where I could supply about 50% of the  dollars they needed at a better rate than a hard money lender, in turn, I would get to learn the business, so in time I could do it myself... Do you think that strategy is no good?

Thanks again!

@Karen Margrave

@Ann Bellamy undefined

Ann Bellamy · Answer

duplicate post

Ann Bellamy · Answer

Taylor, some of my borrowers use money from private investors in a variety of ways.  But if you are inexperienced, you should make sure that

1.  The investor you are funding is very experienced

2.  He/she is extremely reputable (even more important)

Depending on where you are lending and the experience level of the flipper and velocity of deals, and investor could have minimums from 5K to 50K or more.

If the average price of a house is 50K, then 5K can go a long way.  If the average price of a house is 500K, then it is too small an amount for the flipper to manage effectively.

There are many structures:

• You can lend in 1st, or 2nd or even third position mortgage or deed of trust.  (Note, I am certainly not recommending 2nd or 3rd!)
• You can lend unsecured into his operating account for a return not related to the profit in the deal (not recommended)
• You can provide the down payment money in exchange for a chunk of the profit
• You can provide all the money for an even bigger chunk of the profit
	
		In the two cases above, you may be a partner in the single-purpose entity
• In the two cases above, you may be a partner in the single-purpose entity
• You can work out a combination of a loan and a profit split
• I'm sure there are other more creative combinations

• In the two cases above, you may be a partner in the single-purpose entity

But first it matters the deal size in the geography where you are investing, and then the appetite the investor has for capital.

Right now, there is a lot of money chasing few deals in my area, so you may have to have more money to interest a flipper if he has people lining up to give him funding.  And he may have higher minimums.

So all in all, the answer is:  it depends.

How much capital needed to be equity partner for fix and flip?

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