I received an offline question that I felt warranted being posted, here’s the email:
"Ok. I’m full of questions Say you buy a home for $4000, have to put $1000
into it so you have $5000 total in it…you sell it (lease/option) for $10,000.
If you were doing 50/50 split of profits, typically would your investor fund
just the cost of the home, not including fixup costs, or would they provide the
Also if you got the home back in about a yr, I would assume you would continue
to split the profit with your investor but if their was, say $1000, cost in lot
rent and fixup costs would you split the $1000 expense with them? Thanks!"
Typically I split PAYMENTS these days not profit, there is a big difference between the two but I’ve went both ways depending on the deal. And yes my partners normally put up 100% of the money. The potential profit, amount of work needing done, return to my investor, and purchase price are the main attributes that determine what I’m willing to do deal wise.
Assume you buy that $4k home and do work requiring $1k worth of materials (meaning you are contributing about $1k worth of labor) and you deal with the management of the deal which commonly cost 10% of the gross on the open market. The investor puts up 5k in cash to purchase the home and pay for the rehab materials, you bring $1k worth of labor and 10% worth of management.
We sell that home for 10k payable 1k down with the 9k balance payable $240.33 a month at 12.75% for 48 months. Splitting just the PROFIT we’ll assume the investor gets 100% of the down stroke so they have 4k invested / 48 months which means they should receive $83.33 per month as principle repayment leaving $157 to be split or $78.50 each. This leaves the private money investor earning 37.44% on their money.
You receive $78.50 each month of which $24 is really for management meaning you are receiving $54.50 on your $1k investment of time which equals a return of 58.82%. This creates a win/win and isn’t a bad setup especially for a newer investor that is just beginning to attract private investors.
What I’ve found is that after some time in the game an investor doing deals gains experience and becomes more desirable to more lenders/private money investors and their time becomes worth more. (networking plays a big part in this) As more money is available to do deals you start lacking for time to do enough deals to keep up with the demand or you simply hit a point where you don’t desire to do more deals as your hands become full with what you’ve got.
Somewhere along my journey I hit a point where I literally could not keep everyone’s money moving that wanted to do deals. At this point I started having people offer to split PAYMENTS 50/50 in order to entice me to do more deals with them vs other investors.
My typical setup now is one of two systems depending on if I’m working on a L/h or a Lonnie deal. Land homes typically will net the private money investor a principle payback at the eventual time of resale with all rent payments split 50/50 and any profit at the time of sale split 50/50. Trailers (LD’s) will be split 50/50 on all money coming in.
Under this scenario we bought the same mobile for $4k plus $1k in materials and did the same work. The private money investor is entitled to $120.16 plus $500 of the down stroke leaving them with $4500 in the deal for a return of 12.75% obviously which won’t work. It also goes back the best use of your time, we all have 24 hours in each day and it’s up to us on how to spend those hours! What this means is that we as deal makers HAVE to get the best deal possible in order to make partnership deals work! (ever heard the term “if the deal is right the money is there”?)
You MUST treat other peoples money with more respect than your own, the deals have to be better than average in order to really make it work. I shoot for a purchase , holding cost, AND rehab price of 1/3 of retail value on my partnership deals which leaves plenty to be shared and a way to recover from damage that may be received somewhere down the road. More often than not it goes the other way and the home is resold multiple times and both parties receive more financial reward than originally thought if the deal had went term straight off.
Without getting in to to many of the what if’s lets say we have a 10k home that needs 1k in work, knowing that we can’t pay 4k for it because it won’t work as a partnership under a straight 50/50 split we negotiate the purchase price down to $2300 plus we still have to put 1k in to the unit which means the private money investor puts up $3300 total instead of $5k. They are still entitled to $120.16 per month and $500 from the down stroke giving them a yield of 41.38% on their money while you get 230% on your investment of time. This works out better for both parties than doing mediocre deals that are still profitable over a longer time frame so long as nothing goes wrong.
Now lets put the deal in to dollars. $1k in work will normally take about 60 hours give or take (carpet takes less time than paint but cost much more for materials) under scenario #1 you as a deal maker would earn $2616 over 48 months for your effort which breaks down to $43.60 an hour. Not bad for learning a business! Under scenario #2 you would earn $5115 for the same amount of time breaking down to $85.26 an hour. Plus you still would earn $24 a month in management fees each month under either scenario bringing in an additional $1152 over the 4 year period.
Typically my partners cover lot rent, if it becomes an issue due to a slow sale I renegotiate the deal with the partner to make sure it’s fair. As for future damages I will normally just reduce the sales price to compensate for the damages aka if it’s a 10k home fixed the partners received 12 payments and the home suffers 1k in damages I will simply reduce the sales price to $8500 or so and sell it as is. It’s very rare for a buyer to damage a unit from a safety stand point after a rehab and 99% of damage is cosmetic and will not keep someone from living in the home. To date I’ve not had to have an investor bring more money in to a deal but my opinion is that as the money partner this is part of the risk they take. The few times I’ve had safety related damages I’ve been able to fix them with scrap materials or the dollar amount was low enough that it wasn’t worth pursuing due to the type returns I typically receive for my time.
I’m seeing to may people shying away from Lonnie’s advice here lately taking almost a stance of “it can’t be done here” without ever saying it. Over paying for a home is not deal making, it falls more under the terms of gambling (with someone else’s money) in my mind! I’ve been very fortunate over the years and I’ve not received much in the line of damages but it has and will continue to happen from time to time, if you have 5 grand in a 10k LD and someone trashes it and you need to put an additional 2-3k in materials to bring it back to livable standards you are left with a choice dumping it at a loss or waiting forever to basically break even.