Rehab Joint Venture Negotiations
I am currently negotiating a contract to "partner" with someone in Rehab deals.
They.... take the time to find, manage, supervise and market the deal.
I .... purchase the property and pay all expenses.
I am hesitant to do a 50/50 deal because the calculated risks are in terms of $$$$$. Time and effort can be translated as money but if you calculate that translation by the profit of the deal on a 50/50 split partnership the calculation is considerably out of balance. General example:
$50,000 property purchase
$20,000 expenses
$15,000 Net Profit on a 50/50 split on a 4-month project.
Their time is worth $7,500 to them.
My time is worth - $77,500
This is obviously out of balance in terms of Risk. In the contract they have clearly stated that they are free to have other projects and business interest going on.
Is my hesitation and questioning uncommon? If this sounds balanced and a good deal to anyone can anyone help articulate what it seems I am missing? If their time in the deal is their only risk how is 50/50 a fair deal when 10s of thousands of dollars are at stake for me?
Your insight and help are appreciated. Thanks
Greg
Hi GB
If you put up the money and hold first lien possition on the property and don't over lend....+/- 70% of the total value, I would think you are very safe. Good Luck!!
The real question is, do you have the skills and knowledge to do this deal by yourself in case this "partner" fails. Certainly you don't want to be stuck in a financial situation where you have to sell w/o profit, but factor that in. The return on investment question, is 10% return on investment (with your credit etc. attached) a good investment for you over a period of 4 months?
In the example you gave with your numbers you are assuming a role as a private mortgage lender. They lend money to a rehabber based on 60-80% value of the finished project, with anywhere from 1.5% to 5% origination cost and anywhere from 10-15% interest for short term, usually 6 months.
With your numbers given, you are basically getting a return close to what a person acting as a private mortgage lender would get, however, based on a 50/50 split you could do considerably better or worse depending on the final numbers of the project nets. A bigger profit in proportion to the money used would return a much larger profit then a typical private mortgage lender whould receive, but a smaller profit would return a number much less.
So you have to ask yourself, would you be better off just lending your money out traditionally, or is the actual deals you would be doing with this person going to result in you making more this way.
My first question is what is the partner bringing to the team as qualifications?Experience,expertise? Second take a hard look at the numbers the total return reallly isn't all that high for the length of time/amt invested for repairs,are you over-improving?
I just passed on a 50/50 offer by an investor,he wanted me to rehab a property ,about 4 months, needed foundation roof windows,I was to do no other work during the week and we would split profits at the sale.We all have day to day expenses that need to be met .So I had to walk. if your partner can work other deals at the same time 60/40 is more than equitable with a performance clause to keep him or her motivated.
good luck
Mike
I basically agree with mfinley919. You are acting as the banker in this arrangement. For the use of your $70000, your partner will give you all your money back plus $7500 at the end of four months if everything goes according to plan. This works out to a 32% APY. Can you do better with your money elsewhere?
You also need to look at the individual contributions a little differently. It appears that you are just contributing your money to the deal. Your partner contributes more than just his time. He also brings his experience and knowledge to the table. I hope your partner has done these deals before, and his track record of success suggests that he can do the next one successfully.
In the situation you describe, your risk is not your time. You will not have lost any time that you could use in other pursuits by participating in this deal.
Your real risk is the return of your capital. Can this project fail, and if so, how will you be protected from loss of capital? What experience and track record does your partner bring to the table? If your partner has a proven track record of success, you are satisfied with the measures that might mitigate your loss of funds, and you accept the risk involved, then go for it. Otherwise, find a safer route to wealth.
Ever think about what a sales person makes at a conventional company? Some of them make twice as much as the CEOs of their own companies. But they both work the same hours per week. Bottom line: The people that find the deals; bring in the business; make the cash register ring...are never overpaid if your return on investment is reasonable.