Howdy Anita
There's endless ways to structure a deal, so here's one that I think is interesting and helps lower your risk.
Especially if you get caught in a downturn like 2008.
This is a down and dirty run through, I'm not including every little expense, like utilities and such.
So figure out your purchase price, plus repair costs.
Let's say $250k is your purchase and $50k repair = $300k needed to complete the deal and get it on the market.
Use a hard money lender for the first $200k at whatever the best rate you can find. Normal rates are around 12% and 2 to 4 points. And most lenders don't like to lend above 80% of purchase price or LTV.
Next find a money partner, Self Directed IRA partners work great for this scenario. They're getting on average a 7% to 8% return on the options they have through their IRA provider. You can offer them a much higher return. (you'll see below)
Money Partner lends $100k to make up the gap and they will get half of the profits.
Let's assume this house should sell for $400k when all completed and assume you'll have it sold in 6 months.
You'll need to subtract out the $300k in loans, minus the $18k in hard money ($12k = 6 months at 12% and $6k = 3 points on $200k).
Subtract out the $28k to sell it --- Assuming you'll pay 6% in realtor commissions and 1% in your own closing costs. (7% x $400k = $28k)
Recap - $400k sales price, minus $300k loans, minus $18k interest, minus $28k to sell it = $346k in expenses leaving $54k in profit.
Split the $54k in profit with your money Partner, each making $27k.
Money Partner made $27k in 6 months = 52% annual rate of return, which is 5 times greater than what they would have made in the their IRA through a normal index.
You made $27k in 6 months with no money out of pocket = an Infinite Return.
This is your best case scenario which also protects you from your worse case scenario.
Worse case scenario = 2008 happening before you can complete the deal and sell it. Market tanks and now this property is only worth $300k after remodel.
What do you do?
You refinance it with a bank for $228k and pay your Hard Money Lender off.
Place a tenant and it should cash flow, split the cash flow with you Money Partner, which still provides a good return to your money Partner and to yourself (your return will still be infinite). Wait the 5 to 10 years for the market to come back and then sale it for the $54k profit. Also your Money Partner will grateful they have their money in a hard asset if 2008 repeats itself.
I hope this makes sense, I'm trying to show you away to maximize your return and protect yourself at the same time.
This also allow you to do multiple deals at the same time because you are zero out of pocket.
Feel free to send me more specific questions.
Good Luck!
