Hard money at real cost, or splitting profit with a cash partner, on a first solo flip

Partner. On a first flip the 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.

@tylerbrooks9 that is true right up until the partner turns out to have opinions. Cash does not come with a personality and an equity partner does. The two classic versions are the partner who calls every Thursday and the one who wants to change the cabinet color from four states away. Tender, the question I would ask is who makes the call if the house sits at 259 for six weeks. Under debt that is your decision and your carry. Under a split it is a conversation, and a conversation at month five with a partner who thought this was a sixty day project is the worst part of the business.

Before choosing either structure, run the case where the ARV lands at 262 instead of 270. Purchase at 192 plus 30 of scope is 222 all in before any financing or transaction cost. At 262 with six percent in selling costs the net is roughly 246, which leaves about 24 before a single month of carry. Under a profit split that is 12 to you for five months of work. Under debt, points and interest could consume most of what remains. Whether the deal survives the low comp is the question to settle before the question of how to fund it.

Anchor's number is the one that should stop everyone. Twelve thousand for five months of managing contractors is a job, and a poorly paid one. The answer may be neither structure. On a purchase at 192 against a 262 to 270 ARV, the fix is probably a cheaper purchase price rather than a cheaper capital stack.

That's the 70 percent rule talking, @priya_n21, and it's worth saying out loud for anyone reading. Seventy percent of 265 is about 185, and minus 30 of repairs puts the max buy near 155. The purchase is at 192. That doesn't automatically kill it, since plenty of people buy above the rule and still make money. 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.

@derekj19 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.

Most first time flippers default to the partner version, and they do it out of fear. Reading orchard's point about the term, fear may 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 does not sell? At a 192 purchase, in most markets, a fixed up three bed one and a half bath rents. If you can carry it as a rental at the end of the term you have an exit that is not a fire sale. Under a short term rehab loan you would need to refinance out, which is its own approval and its own timeline, and the numbers should be checked with the lender before you count on it. Under a partner, the partner has to want to be a landlord, and 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 rate is rarely the clause that hurts. 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 at how the extension is priced and whether it is at the lender's discretion or automatic on payment of the fee. Look at whether the loan is recourse and whether a personal guaranty is attached, because that is 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 will 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.