Am I being too greedy?

Question

Hey all!

Im a reasonably new investor and wanted to share this deal with others to get their opinion.

I have a deal sent to me from a friend of mine.. It looks great if I were to do it myself, however he doesn't want to assign it to me as the return is great.. he wants me to fit the bill and he takes 50% returns. (Buy rehab and hold)

Is a 50/50 split reasonable for a finders fee? One persons provides the capital while the other brings and manages the deal?

Its a 3 unit building ( with a 4th unit being a moldy basement right now, will be rehabbed at a later date)

The numbers look like this;

Purchase: $110k

Rehab: $50k for 3 units

In a decent up and coming area.

We have locked in 3 families for year leases at $1500 per unit per month.

Total rent =$4500pm before expenses

Were looking at $2200 cashflow.

Then split 50/50 is $1100 p/m.

So $1100pm cashflow return on a $160,000 investment.

Thanks in advance for your opinions.

Cheers

Brent Coombs · Answer

@Max Shepherdson, "whoever has the gold, makes the rules". So, if he wants half, is he going to pay (nearly) half? If he wants you to "fit the bill" 100%, then he has only "earned" a normal wholesaler fee. If he wants ongoing drip feed (net) income, then his proportion should be much closer to 0% than it is to 50%.

What you could have asked is: is my friend being too greedy? (Answer: Yes)!

Now, read the first sentence again. Cheers...

What you could have asked is: is my friend being too greedy? (Answer: Yes)!

Now, read the first sentence again. Cheers...

Barbara G. · Answer

If it were my deal and I wanted it I would figure that he should contribute what the regular finders fee would be plus if he is going to manage the property he would get an additional managment fee of 10%.  He can want 50% or 70% but that does not mean anyone will give it to him.  The only one that can lose here is you

What can he do with this deal if you do not underwrite it? That's why he is wholesaleing it because he as no money.  Is this man in your town and is the property in your area?

In addition you should be running all the numbers by BP or thru the BP calculator    Just because you think this is your cash flow does not mean it is correct.  It could be less.

Where did you get this renovation figure from?  Who did the inspection on this property and where did the renovation numbers come from?  Has everything come from your friend?    I hope the renovation numbers were not from your friend because it could be far more and it usually is far more.  Are the tenants in place and currently paying the rent you have listed and how do you know that?

Brent Coombs · Answer

@Max Shepherdson, there is a BIG difference between: "He has another friend who raises capital" and "he wants me to fit the bill". If in your opening post he was only asking for you to FIND someone who could provide the capital (and thus you would BOTH sign the Loan agreement), then yes, 50/50. There seems no reason for you to take 100% of the borrowing risk. Maybe his other friend has finally woken up to that thought...

Max Shepherdson · Answer

I just want to say a massive thank you Guyoz, Lynn , Barbara, Jordan and Ali!

Thanks for sharing your thoughts on this topic, its much appreciated and great to see other peoples perspectives especially people who are more seasoned than myself!

Regarding the deal, He has another friend who raises capital and he brings the deal.. they go 50/50 and then give 10% return to the people who they borrowed the capital from.

I did not go for that deal and i once again appreciate your thoughts :)

Ali Brooks · Answer

That should not be how it works. If he found the deal and shows it to you and you buy like the others said you should just pay a finders fees of 5% whatever is normal around you. Also if he manages he could take a management fee. I 100% agree with what everyone else is telling you. You are taking all the risk and he is not. He should not get 50%

Jordan T. · Answer

Does your friend have a lot of experience, and have his past deals been accurate as far as estimated numbers translating to actual numbers?  If he was really experienced I'd expect him to use private lenders on his own, especially for a deal this good.

It's so important to limit your risk here...you're taking 100% of it and your friend has only upside.  If the numbers aren't rock solid, walk away.

If you do go through with it, another option is that you could act as a private lender, getting ~10% interest while the deal is going on, and switching to 50/50 ownership after you refinance your money out upon completion of the rehab.

Lynn McGeein · Answer

So you provide the funds and he provides the work and management?  How will you protect your investment, espeically if he wants to sell his interest to someone else down the road?  Who makes decisions on rehab?  What happens if he isn't doing the work to your satisfaction or you feel he is wasteful with funds?  Who gets paid if some tenants don't pay or expenses are higher than planned?   What if he starts neglecting maintenance and repairs so he can take more home each month?

He very well might turn out to be a great business partner, but partnerships are hard, even if you have everything clearly spelled out.   After initial rehab and placing tenants occasionally, there's not much other work to justify a 50% management fee for eternity.   If I could figure out answers to all that (I have control issues after watching family members struggle in business partnerships that started great but ended badly), I'd still want the first $1200 of rents each month so I'm guaranteed a return on my investment, then I'd take the rest of rents collected, pay the expenses out of that, then split that balance 50/50.

You also would need to discuss the moldy basement issue and who is paying for that, as not sure how it's handled there, but one tenant who says their child is sick due to mold in the building and you are  looking at mold remediation sooner than you thought.

Guyoz Golan · Answer

Hey @Max Shepherdson, every deal has it's own set of rules, and it really depends on what the other partner is bringing to the table. It is hard to tell if 50/50 split is a good way to go by the info that was given.

I'll just add my 2cent that you should look up the '50% rule' with regards to your income and cashflow.

All the best in this deals and others to come!

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