Finding Money Down for Your Fix and Flip: The Friends and Family Plan

Posted by Bobby Montagne on Jan 12, 2017

You’ve found the perfect house to flip, run the comps, found a contractor and a spoken with a lender about a fix and flip loan. You’re ready to make an offer and get the project rolling. All you need now is some cash to put down. To meet their loan to value ratios (LTVs), nearly all lenders require borrowers to have some "skin in the game" or equity in each flip project.  You are low on cash or it’s tied up in another project.  What to do?

Friends and Family: A Logical Start

Friends and family are a great place to start when looking for help with money down.  You know them, have a track record with them, may have worked with them before on other types of projects, and you have access to them to propose your deal. 

friends and family equity partner.jpgLaying out your Proposal: Risks and Rewards

Before you approach friends and family, prepare a detailed analysis about the specific investment opportunity. Research the project thoroughly, and be very clear and honest about the pros, cons, and associated risks. 

[Check out our tips for fix and flip success] 

Next, devise a business plan that clearly articulates the time line, projected milestones, and budget of the project as well as the terms of the proposed partnership, joint venture or investor relationship you wish to enter into with them.  Approach the entire process like the business relationship that it is. 

Real estate partnerships offer your chosen family and friends the chance to invest money into your fix and flip project(s) in exchange for a designated ownership percentage. As equity partners or investors, your family and friends will have an opportunity to receive money that the property generates. So while they will be taking an investment risk, they will also be in a position to benefit from the sale of the property. 

[US News: pros and cons about investing with a real estate partner]

Partnership Considerations 

  • Legalize your arrangement. This is a business partnership and should be legalized as such. The most common way to structure these partnerships are as general partnerships, limited liability companies (LLC), limited partnerships or corporations.  Consulting with an attorney who specializes in real estate partnerships can provide valuable information about the process and the best type of agreement for your situation.
  • Clearly establish work for each partner or investor. For example, your friend or family member might contribute the cash needed to make the initial down payment and closing costs, while you will be responsible for securing the remaining funding, buying the property, and managing all of the construction. Or your partner may want to take a more active role in the day to day operations of the renovation.  Spell this out clearly ahead of time.
partnership contract-1.jpg
  • If you choose to set up a partnership, determine the aspects of the deal that will be included in the partnership and split. As partners, your family and friends will be able to participate in all aspects of real estate property ownership. This will allow them to receive a designated ROI percentage that might include: property appreciation, loan paydown, cash flow, and monies from the sale of the property. Remember that the addition of your partner’s funds reduces the amount of your construction loans so that should be taken into account as well when determining what is included in the profit split.
  • Decide how the NET (profit or loss) will be split. Remember to include all costs when determining the profit (or loss): fees, refinancing costs and any appreciation.  There are many different ways to split the profits, and not one right way. It all depends on how much money each party brings to the deal, how the work is divided, who takes the most risk, etc.  Splits range from 50/50 to 80/20 based on the above factors and what the two parties agree to. The key is to decide and formalize the split ahead of time.
  • Outline terms for reporting the income (or loss) for tax purposes for each party.

[More about real estate partnership agreements from Bigger Pockets]

Following the steps above gives your partnership the highest chance of success, which can be a foundation for many future successful real estate deals. 


 

Bobby Montagne

Author

Bobby Montagne is a real estate entrepreneur with three decades of experience in commercial and residential property development, finance and sales. Having successfully overseen $15 billion in career transactions, he is among an elite class of real estate innovator that has consistently delivered high quality returns to partners and investors.