Ask Cornerstone: How do I structure a deal by partnering with family member private money lender?
I’m a new Real Estate Agent and I want to start fixing and flipping with a family member who will be the financial backer. How should I structure the partnership if they will be fronting all of the money and I’ll be the project manager and real estate agent on the deal?
Would I be making the commission on both the buy and sell of the property and the family member would be putting up all the money for purchase and construction costs?
How should I structure the partnership? Are the profits split equally? If I were the money person, I’d want a bigger percentage of the deal since it seems like it’s more risk and it’s my money.
Before deciding on the partnership split, first look at it like a business outside of the partnership. Consider that most private money lenders require the flipper to have “some skin in the game”. That is, about a 20% down payment. When it’s the flipper’s own project, the investor only receives the interest from the loan.
In a partnership situation, the lender isn't earning interest on their loan. In my opinion, a 50/50 split in your situation is more fair if you do not take any commission for purchasing the property. If you sell the property and take a commission, it should be limited to 1%.
Also, make sure to not take any undue risk with your family’s money. Make sure you know how to properly analyze a deal for its potential profitability. You can use our flip calculator (a free download when signing up for our newsletter) to analyze your projects.
I recommend that you attend investment clubs and talk to other house flippers and investors. You’ll probably find other people with experience with the same situation. If you are in Southern California, we have a listing of upcoming real estate investment club meetings here. Otherwise, try Meetup.com and a google search with your city.