Hi All and @Eric T.
Unfortunately, the answer like many thing is usually is not black or white. In the right circumstances both paths could be rewarding in their own way, and in the wrong circumstances both paths can be poor investments. A lot of it is about the specific situation, the structure of the deal, what your goals are, how well or long you have worked with the operations, etc. Essentially the whole discussion is about risk and who takes what portion of it. If more of the risk is on you, you should expect to be compensated for taking it and similalry if someone else is taking more risk they will build that into their returns. In a way, if done right risk allocation / apportioning should be close to a zero sum game . However, real estate is full of predatory operators as well as good ones, surprises that will happen, and requires a lot of extensive thought and due diligence. If you are more likely to skip that or are new to investing, then I would more often than not stick with the first path as there are more safety catches in the process like most have said.
With that said, there are situations where the second path can make a lot of sense too depending on what your goal is. if I was going to be laying out the capital to do the rehab and take some the risk than I would expect there to be a compelling reason to do so. As @Charles Worth @Dawn Anastasi @Jay Hinrichs @James Wiseand others have mentioned this path is not truly turnkey and your participation is futher down stream. As such instead of paying a price in path A, for the same property I would expect to pay a lower price in path B (e.g. have a greater degree of potential equity in the deal) in order to compensate for some of the greater risk. So if path a and path b essentially modeled the same all in price at the end, then there is no benefit or reason for path B - You are taking more risk for no additional return. However, if path B (at least from your initial projections if all things go smoothly) places you in a reduced overall cost basis that could pay off over the long haul depending on your strategy and risk/reward perspectives. You just need to be very careful about accessing how likely you think things will go smoothly, what structure / safety points you have included in the structure in case they don't, and how long / deep of a working relationship / trust you have with the group. I certainly would be more cautious if I hadn't worked with the team for several deals or if I didn't have a lot of insight into their operations, reputations, scopes of works, etc.
Cheers,
Eric
