Hard money at real cost, or hand half the profit to someone with cash

Partner. On a first flip your timeline estimate is a guess and you already know it. A partner absorbs the guess being wrong. A lender charges you for it and then charges you again to extend.

@verity that's true right up until the partner turns out to have opinions. Cash doesn't come with a personality, an equity partner does. I've had one who called every Thursday and one who wanted to change the cabinet color from four states away.

tender, the question I'd ask is who makes the call if the house sits at 259 for six weeks. Under debt that's your decision and your carry. Under a split it's a conversation, and conversations at month five with a partner who thought this was a sixty day project are the worst part of the business.

Before either one, what happens if the ARV comes in at 262 instead of 270? Run that. 192 plus 30 is 222 all in before any financing cost, before closing on both ends, before commission. At 262 with six percent of selling costs you're looking at roughly 246 net, so 24 before any carry at all.

Under a split that's 12 to you for five months of work. Under debt, points and interest could eat most of what's left. I'd want to know whether this deal survives the low comp before I picked how to fund it.

anchor's number is the one that stopped me. Twelve thousand for five months of managing contractors is a job, and not a well paid one. Is the answer here maybe neither structure, and instead a cheaper purchase?

@marlow that's the 70 percent rule talking and it's worth saying out loud for anyone reading. Seventy percent of 265 is about 185, minus 30 of repairs puts the max buy near 155. tender is at 192. That doesn't automatically kill it, plenty of people buy above the rule and still make money, but it does mean the deal has no cushion and the funding choice can't create one.

I hold things for twenty years so take my view for what it is. The part of this I'd think hardest about is the term. A loan with a hard end date turns a slow market into an emergency. I've watched people accept a price they'd have laughed at in month two because month six had an extension fee attached.

A partner has no end date unless you write one in. That's the actual difference between the two options.

Is there a middle version where the partner lends you the money at a fixed rate instead of taking equity? I've heard of people doing that with family and I've never understood whether it's better or just friendlier.

@beacon that's a private loan and it's a real structure, though it needs paperwork with a real attorney behind it in whatever state the property sits in, since recording and lending rules aren't the same everywhere. The trade is the same as with an institutional lender. Fixed cost, fixed clock, all the upside is yours.

The reason people go equity with friends and family is that a fixed payment due on the fifteenth is a hard thing to owe someone you see at Thanksgiving.

I'm planning my first purchase and I've been assuming I'd do the partner version, mostly out of fear. Reading orchard's point about the term, I think fear might actually be the correct input on deal one. You only get to be surprised by rehab timelines for the first time once.

I write checks into other people's deals so let me tell you what the partner side is thinking, because tender should know it before he pitches.

A fifty fifty split on a first timer's cosmetic flip is generous to the operator. I'd want a preferred return on my capital first, meaning I get my money back plus some percentage before we split anything. On a deal with a projected 40 of gross profit and real chance of 24, the preferred return could swallow most of the split. Suddenly your half of the upside is a quarter of it.

So don't compare debt against an imaginary clean fifty fifty. Compare it against the terms a real cash partner will actually offer you, which you won't know until you ask three of them.

canton just changed my vote. I'd assumed partner meant simple and it clearly doesn't.

From the tools end of it, the draw schedule matters more than the rate on a scope this light. Paint and flooring and fixtures don't produce obvious inspection milestones the way framing does, so you can end up floating your own material costs for weeks waiting on a draw. I've had guys chase me for payment because their investor's lender wouldn't release until a walkthrough that took nine days to schedule.

If you go debt, ask exactly how many draws, what triggers each one, and how fast they fund. Get it in writing. That answer varies wildly lender to lender.

One thing to have in your pocket either way. What happens if it doesn't sell?

At 192 purchase in most markets I manage in, a fixed up three bed one and a half rents. If you can carry it as a rental at the end of the term you have an exit that isn't a fire sale. Under a short term rehab loan you'd need to refinance out, which is its own approval and its own timeline, and you'd want the numbers checked with the lender before you count on it. Under a partner, your partner has to want to be a landlord, which most cash partners emphatically do not.

Ask that question at the front, in writing, whichever way you go.

Read the documents on both sides and the comparison changes shape.

On the rehab loan, the clauses that hurt aren't the rate. Look for the default interest rate, which can be a large step up and applies from the date of default rather than the date anyone tells you about it. Look for how the extension is priced and whether it's at the lender's discretion or automatic on payment of the fee. Look at whether the loan is recourse, and whether there's a personal guaranty attached, because that's the sentence that decides how bad the worst case is for you personally. Look at the draw inspection fee, charged per draw, which on a light scope with five draws is real money.

On the joint venture, look for who signs the listing agreement, what happens on a deadlock about price, and whether either party can force a sale or buy the other out. Also look at what happens if the renovation goes over budget. If the agreement is silent on who funds the overage, you'll be having that argument at the worst possible moment, and the answer will depend on state law and on your operating agreement, which is a conversation for an attorney in your state rather than for this thread.

tender, you said you read the paperwork for a living. Ask both counterparties for their actual document before you vote in your own poll.