BRRRR and Creative Financing

[Daniel Brewer]

Am looking to get some more feedback in regards to creative financing and the BRRRR method. As many probably know, you need 2/3 things:

1. Knowledge

2. Hustle

3. Money

Now let's say you have the first two. You need the third: a partner with the finances. You find a home that is 25k purchase price, 75k rehab, and 133k ARV. Perfect BRRRR home.

For simplicity, I’m not going to use closing costs or loan fees + points in this example.

Your lender gives you a hard money loan during the rehab process which is 80% of the purchase price + rehab. The remaining 5k is the down payment which your partner (who has the funds) pays.

You run the rehab and everything else, and success. Perfect BRRRR. House is appraised at 133k, 75% cash out refi, the hard money loan is paid off plus your partner gets his 5k back. You get 50% equity and cash flow profits for doing all of the work and he gets the other 50% for funding the deal. Infinite Cash on Cash ROI.

Now, let’s say some things go wrong in the process. For example, the rehab goes way over budget or the house doesn’t get appraised at the value you were hoping for. Or, the property cash flows in the negative somehow. Now, your partner has to pull more out of his pocket. So instead of getting his 5k back that he put down, he (for example) had to put 10k into the property after the refinance. Money is left in the deal and not a Cash on Cash return for the finance partner.

What do people typically do in this situation? The partner is now "down" 10k. Yes, he does have 50/50 in the asset but it wasn't a completely successful BRRRR. The cash on cash return on investment for the finance partner is not infinity. The partner may be upset about this.

Essentially what I'm looking to know is, as the partner using no money, what are my risks in a deal like this? What are the risks for the finance partner, especially in a worst case scenario?

Looking for some real life examples here