Partner up or go alone with Hard Money?

Question

Hey BP,

Seeking some advice.

I have a deal in contract to develop 5 units. Currently working on obtaining the financing. It would be a BRRRR deal that I would ultimately finance at 70-75% LTV of the ARV. The tricky part with this deal is that it is out of state across the country, I am in CA. I’m going through a small local community bank that will fund the purchase and rehab, but wanted to have solid backup plan in case that financing falls through. I see my alternatives as partnering up to purchase property in all cash, and give up 50% of the deal.  Or go hard money route. The only problem is I have never used hard money before.

In this situation would it be more beneficial to cut in a local partner on the deal who I know and trust to keep the project moving forward? I see lots of risk in trying to solely own the deal and do hard money on a project out of state. By bringing a partner in I lose 50% equity, but at least protect from some risk and have a motivated party to on the ground to ensure project keeps moving forward.

Just looking for thoughts with the options and risks for each. Really don’t want to give up 50% or any equity if I don’t have to.

Thanks!

Erik W. · Answer

Agreeing with @Joe Splitrock. While bringing in a partner makes sense in some cases, typically smaller deals don't leave enough "meat on the bone". Think of it this way: it takes about the same amount of time to negotiate a deal, communicate with partners, and do all the day-to-day tasks on a 20 units deal as it does a 5 unit deal, but the reward potential is 4x greater on a deal 4x the size. If this is your first deal and you're just looking to build credibility for a bigger deal later, then perhaps it's worthwhile.

Regarding hard money, keep in mind that most HMLs will only go up to 60-70% of value "as is" making development extremely difficult.  Also, development isn't exactly the same as BRRRR because you're building from scratch vs. renovating/remodeling.  Much harder to calculate ARV on a new build unless you have comps going up all around it.  I'm not familiar with your area, but no one in my market is building new 5 unit structures.  Much of the value add strategy that allows BRRRR to succeed comes from buying far below market value "as is" and raising the property to market value in fully reconditioned state.

Why only 5 units?  Is this a small piece of commercial/MF land that won't support more?

Evan Polaski · Answer

@Kevin Reinell, interestingly, upon first reading your post, I was leaning towards the partner route.  Yes you get less, but based on you what you said of having a partner on the ground in the area, that you trust, it sounds like a lot of work will be taken off your plate and on theirs, at least how I read your post.

I don't know what your experience is, but my general take is hard money loans are the last option I go with.  If this is your first development project, you are already taking on a lot of risk just in trying something new, so why compound that with a steady interest payment coming at you each month and the potential of having to walk into a refi with a check in hand.

If you are an experienced developer, that is a much different story.

Joe Splitrock · Answer

For a deal this small, I would go it alone. I would rather have 100% of the deal to keep me motivated. Once you start getting half, it becomes less worth your time. Of course it depends on the deal size. If the deal is huge then 50% may be great. My secondary concern is trusting the partner. Many problems occur in partnerships. If the deal is all mine, my success depends only on my ability. Whether I succeed or fail is all on me. That is fine with me because I can pull my own weight and then some.

Kevin Reinell · Answer

@Evan Polaski agree with your thoughts 100%. It would be my first hard money deal and handling the heavy interest payments and rehab timeline from across the country would be challenging since I would worry about keeping contractors on schedule. Since it’s my first true BRRRR deal like you said, it may be safest to add the partner on the ground there since I know and trust him, and he’s an agent.

Conversely, If I want to keep 100% of the deal I can purchase the property in cash and then worry about rehab loan separately once property is closed and in my name. Not sure if that is worth it from a leverage perspective though.

Kevin Reinell · Answer

@Erik Whiting thanks for your thoughts. It is actually a small existing multi family/commercial structure that is currently situated as a triplex with an ADU. The square footage is enough to develop the triplex into a fourplex and then rent out the ADU. So that would be the total of five units. So it’s more of a rehab with addition of an extra unit, but requires re wiring for electric plumbing etc. I do agree about “not enough meat on the bone” comment. I may just be able to purchase the property in cash outright and then worry about rehab loan after close since deadline to close is approaching.

Partner up or go alone with Hard Money?

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