All Forum Posts by: Paul Daniels

I would pay myself in equity as opposed to market rate GC rates. 

I am an experienced investor/contractor who specializes in flips in New Jersey.  Even in this tough market we have been able to do pretty well this past year.  With it becoming harder than ever to acquire new properties we are looking to get into the commercial space.  I am looking for some advise from some seasoned professionals on the best way to structure this commercial deal.

I am currently negotiating with the seller to purchase a mixed use property for around 270-300K.    It is a commercial storefront and 4 rental apartments above.  The property is located in an opportunity zone.  The property is currently vacant and in total disrepair.  We will need to invest around 250K to renovate the entire building.  This is in a C type area.  The conservative rent roll is approx. 6K a month.  The after repair value should be right around 500K or so.  

I am using private money from an investor partner for the initial purchase as well as the rehabilitation.  Since I am a contractor I will be facilitating all the repairs to the building.  Once the repairs are completed I will be self managing the building and handling all aspects of operations. My question to the group is what is the best way to structure the deal between myself and my investing partner.  I could do a sash out refi and take a long term mortgage and cash flow around 30K a year but that would include giving away 308K in interest payments over the lifetime of the loan.  I would prefer keeping my investment partner on board long term as an equity partner.  However, it would have to be attractive to him and I do not want to take forever and a day to get him his money back.  I was thinking of something along the lines of a quarterly payment of all the proceeds minus expenses until the total loan amount is paid back.  At that point the project would convert to an equity percentage. I have not come up with what the equity percentage would be.

I am open to all advise and suggestions on what would be the best approach.  My investing partner is also a close friend whom we have done many fix and flip deals together.  Thank you everyone in advance for your input.

All the best.  

The 70% rule does not work in such a hot market.  You will end up losing out to other investors paying more money due to limited inventory.  You have to decide what your time is worth.  If you can make $30K-40K in less than 2 months it would be worth getting involved with.  If you can trust your contractor to handle all the rehab without much of your time its a home run.  Do not under estimate the work involved flipping a house.  Too many people watch HGTV and do not realize what is needed to comply with current building codes.  It can be very time consuming dealing with the township, obtaining permits, CO. multiple inspection, etc.  You can always wholesale the property to an investor and make a small quick profit and have them agree to list it with you once repairs have been completed. 

I agree with your post. If you read the Facebook Wholesalers Group you will see what a disaster the industry has become. People claim to be an “investor” yet do not have a down payment let along the ability to purchase a property in cash. The worst part is people contact us daily trying to sell some overpriced POS that has been sitting on the mls for 3 months because it’s overpriced and nobody can make money doing anything with it.

I am a general contractor in NJ as well as property flipper ourselves.  I think the best advise would be given to you by your attorney.  I think people on this site are trying to be helpful but are not giving you the best advice.  I see someone even mentioned that the contractor might be friends with your attorney.  That is completely crazy for many different reasons.  When we price a project for a customer competing a flip it includes the labor and materials as one price.  This is because after spending years in the business we know where to obtain the best pricing on the materials that make the most sense.  If the job gets cancels we would expect considerations to be made for the time taken to measure, order, pick up and deliver the materials.  More importantly you made a bad decision in choosing a contractor that was not capable of handling what you hired them to do.  Our crew usually has 6 people working all day on a complete rehab project and we are usually able to complete it in less that 45 days.  Waiting nine months to complete a relatively small scope of work is terrible.  A good rule of thumb is to have your contractor complete $1,000 of work per day.  That is the industry standard for most professionals in this industry.  If your hiring a handyman and his helper you are not going to get that the same result.  Finally, my advise would be to speak to the contractor and try to pay him $1,000 to make him go away and move on with your project.  Aside from the legal aspect the contractor knowing the house is empty can easily go to the property and break some windows, graffiti the property, cut some wires and countless other things that would cost you a lot of time, money and aggravation.  Good luck on your project and please repost how the situation turned out. 

We have done work in Patterson and the city is a disaster. The Building Dept is very difficult to work with. They are so understaffed half the time they do not show up for Inspections and never answer or return calls. Our properties were broken into on a regular basis , we dealt with squatters as well as some other nonsense. The money made at the time was not worth the headaches. It would have to be a tremendous opportunity for me to work in that area. 

We receive weekly emails with pretty much the exact same thing you sent out. Unfortunately most new investors want us to provide estimates for properties in which they do not even own yet and will never close on. Additionally, in this hot market these new investors will never get the property for below asking price using financing when there are multiple above asking cash offers. We have been involved with a few of these exact circumstances that are not worth anyone’s time.

@Sean Jones

We have flipped 13 properties in the past 2 years in NJ. Unfortunately as much time we have spent with wholesalers we have not seen a good deal from a real wholesaler in years.

In this hot real estate market it does not make sense for a homeowner to sell their property significantly below market value.

I have a VA calling and sending SMS messages to a listing of vacant property owners. We are currently using XL and the VA is just updating the sheet as needed. I am looking for a CRM type system similar to a database. XL is not great for displaying all the info in one simple easy to read screen. We are using batch leads which is good for obtaining the data but not good for the VA to enter the results of the contact communications. There are so many CRM programs but we are looking for one already made for wholesaling business.

Thank you in advance for the help. 

Thanks for the reply everyone. To Romeos point, being a contractor I am only paying for time and materials to complete any necessary repairs. Since we will be completing a full rehab most items including roof, plumbing and heating/hot water equipment will be new. Therefore, we do not anticipate many large repair issues. While I agree Somerset is a much nicer area and have lower vacancy rates, the properties do not cash flow as well. I would rather receive $1,200 per month from section 8 on a property that I invested 50K total instead of a higher value home that the investment is upwards of $200K. Trenton properties come with a lot more headaches but I think the ROI is much higher.