Working out when a 50/50 JV with a flipper beats a straight loan

The two structures you're comparing behave differently in the downside, which is where the choice gets made.

As a lender with a recorded first lien, your claim is a fixed amount against a specific property, and your remedy is foreclosure. Foreclosure timelines and whether the process is judicial or non-judicial vary substantially by state, and in some states a six month sale can become an eighteen month recovery. As a JV member, you have no lien. Your claim is against the entity, subordinate to whatever it owes, and your remedy against a partner who mismanaged is a lawsuit over fiduciary duty, which is slow and expensive.

The economics you've laid out show the JV paying a premium only in the strong case. That is normally the argument for the note. What complicates it is that repeated lending to a single borrower on a revolving basis, with points and a rate, can raise licensing questions in some states depending on how the loans are structured and who the borrower is, and profit-sharing arrangements can raise questions about whether an interest is being offered. Both are questions for a lawyer licensed where the properties sit, and the answer varies by state.

There is a middle structure that shows up often. A note at a lower coupon with an equity kick, so you take, say, 9% and 20% of net profit. That gives you lien position for the downside and some participation in the upside, and it prices your capital below 50% so a capable operator will actually keep working with you.

The assumption doing the most work in your numbers is the five month cycle. At seven months your four houses become three, and your annual return drops roughly 25% in both structures. Ask for his last nine actual purchase-to-close-of-sale dates.

Two deals in progress and both running late is exactly the kind of thing to argue about before signing off on a five month figure. Nine flips of history and never a house that sat through a slow quarter? Worth asking which of the nine took longest and what happened. If the worst one was six months, either the operator is lucky or the market's been forgiving. Also, 55k rehab on a 145k house isn't cosmetic. That's mechanicals or a layout change, and those are the budgets that run over.

I do thin margin fast deals and 22k to 28k net on a 200k basis is tight enough that one bad inspection eats the whole thing. What's in his net? If selling costs, holding, insurance and interest on your money aren't already deducted, his 25k is more like 12k and this conversation is over.

Get the deal-level P&L for his last three, line by line, including his own labor if he charged any. That's where I've caught people. They pay themselves a project fee out of the middle and then split what's left 50/50.

@joe_delgado5 is on it. From the construction side, it is also worth asking whether he or an affiliate is the GC. If he is marking up his own crews and then splitting profit, he is paid twice and the capital partner is paid once. That is not automatically wrong, subs cost what they cost, but it should be written down as a fee and disclosed rather than buried in a rehab budget that cannot be audited. And on a 55k scope, ask to see one actual scope of work document. A page with round numbers on it is not a budget, it is a guess.

Nobody has mentioned who holds title. In a JV the entity holds it and the lender is relying on the agreement. As a lender proper, the position is on the deed of trust or mortgage, recorded, and recording practice differs by state. Title should sit in an entity the lender controls, or a lien should be recorded, not a handshake about a partnership.

The 240k revolving through four houses a year confuses me. If a house is 145k plus 55k that's 200k tied up for five months, so with 240k you can't really run two at once. Doesn't that cap him at two, maybe three a year unless he sells faster than five months? Where does the fourth house come from?

@aliyah_b that is the best catch in the thread. A 240k revolver supports one house at a time with about 40k of slack. Four turns a year requires a three month cycle from purchase to resale proceeds, and a five month cycle yields closer to two and a half. Either the house count or the timeline is wrong, and Thicket's 19% to 25% is built on both. Thicket, it is worth redoing the whole comparison at two and a half houses a year and asking whether the risk still earns its keep. At that volume the note tends to look considerably better than the split.

I don't have experience with this, so I'm asking rather than arguing. If the JV only pays more when he does well, and the note pays the same either way, why would he ever choose the JV? Isn't he giving away 50% of his good outcomes to avoid a fixed payment he can probably afford? Something about that doesn't add up unless he can't get the note anywhere.

If the goal is income without a second job, this thread is a good reminder that a 50/50 JV with a flipper is a second job. You'd be checking scopes and chasing timelines, and every overrun turns into an argument. The note version is closer to income. Not as much of it, and that's a trade worth taking every time.