He Gave Me $500K.....To Play!

[William Bratrud]

True story,

About two years ago I was approached by a wealthy friend and given the opportunity to manage and invest $500K of his funds into the real estate market.....whats the catch you ask? no catch, After watching me flip two deals he simply offered me an opportunity to invest his funds in return for 1/2 of the profit on every deal I do. As a bonus he insisted that I also compensate myself for any time spent on the projects at a reasonable rate. 

What did I do? I took him to lunch, we discussed the details and I took him up on the offer. We Hired a lawyer, formed an LLC and immediately I put his money to work! Over the past 22 months I have completed several Southern California fix and flips in my spare time and produced a total of about $250K in profit for an average ROI of 50% annual. In addition to this it has generated about $20K additional annual income for my time spent on the projects. After rehab, I sell the property and the profits are split 50/50.

So what the issue? 

I fell like The money should be working harder. I feel like I have been given a great opportunity and I want to maximize the potential. I feel like I should be able to double the money within two years, triple it within 3 and so on.... Yes I know that these are some decent returns, but I also know the tremendous power that real estate has to create substantial wealth when you invest it properly. 

Given the same opportunity, What would you do? How and where would you invest? 

[Jo-Ann Lapin]

Wow a lot of hard earned work to give so much away . Just my 2 cents .

[Jay Hinrichs]

Originally posted by @Jo-Ann Lapin:

Wow a lot of hard earned work to give so much away . Just my 2 cents .

I have to disagree..  NO risk  infinite returns for the contractor to me it does not get any better.

no stress of going through a mortgage situation and being on the hook to pay a lender back 

cash flow goes out instead of no payments.. 

I get it you can make more but your also taking on huge risks when you borrow money.. 

[Jay Hinrichs]

keep doing what your doing..  the other thing that could work is value add multi family IE do bigger deals.

use the 500k as a down payment.. 

or new construction. on new construction we usually double our cash COC within 12 to 14 months.

[Dan H.]

As the other posts indicated you would have earned a lot more if you had use HML or private money and not split the profit. If both parties are fine with the arrangement then let it be.

So what would I do to increase the return. I would look to scale your expertise up to larger MF. You can only purchase and work on so many SFR at one time. However, managing the rehab on a 40 unit apartment and repositioning it (getting the rents raised) might be possible. Basically you have been successful but need to scale to provide better return.

Good luck

[Eric M.]

Originally posted by @Jay Hinrichs:

use the 500k as a down payment..  

Who has hacked Jay's account? This does not sound like the sage advice you would normally give as someone who has been through multiple RE cycles. Your previous comment extolled the virtue of this deal's lack of risk. Now you are advising him to leverage it up? Who is on the hook if it goes bad? We both know what can happen to a leveraged Cali flip in very short order.

Put the whole 500K to work, sure.....but leveraging it without investor approval or possibly without the extra funds to support the deal if it goes bad seems like a very very bad idea.

[Jay Hinrichs]

Originally posted by @Eric M.:

Originally posted by @Jay Hinrichs:

use the 500k as a down payment..  

Who has hacked Jay's account? This does not sound like the sage advice you would normally give as someone who has been through multiple RE cycles. Your previous comment extolled the virtue of this deal's lack of risk. Now you are advising him to leverage it up? Who is on the hook if it goes bad? We both know what can happen to a leveraged Cali flip in very short order.

Put the whole 500K to work, sure.....but leveraging it without investor approval or possibly without the extra funds to support the deal if it goes bad seems like a very very bad idea.

OK let me digress I made the assumption without verbalizing it that the person who gave the 500k would have the ability to get debt on a value add MF.  And that the contractor would continue in his roll of finding fixing and reselling and splitting profit.. not that he would go out and borrow money on his own .. and if he has 500k working in most of CA they probably do marry that with some debt.. being that So cal and bay area average prices are well north of 600 to 1mil..