Partnering on real estate deals can save your profit margin
Now I believe that it is best to advise that there are times when 50/50 is best and there are times when an interest rate is best.
Let’s assume that you buy a bank repossessed home for $60,000. You then borrow $60,000 from a private investor and then $10,000 from the private investor to fix up the property. That brings the total loan amount to $70,000.
It takes you eight months to fix up the property and close the property.
After 8 months, you sell the property for $85,000 and you net $82,000 after paying all associated fees. That represents a profit of $12,000 ($82,000 minus a purchase price of $60,000 and $10,000).
If you were to borrow money from the private lender at 15% interest, you would owe the investor $8,000. That is 8 months at 15% of $80,000. That represents more than half your profit. You receive $6,000 and the investor receives $8,000.
If you split the profit with the investor, you would have only given him or her only $6,000.
When you pay a set interest rate, you are taking on all the risk, and the investor gets paid whether or not you make a huge profit. For example, if you made only $6,000 profit, you would still owe the lender $8,000. Thus you would lose $2,000 for all your time invested. If you had split the profits with the private lender, you would have made $3,000.
There are a lot of people out there who will tell you that a 50/50 profit split is a bad idea. But it might work in some cases. Don’t turn your nose up at it.
Questions and Answers
If you're looking to make money in real estate, you probably know that foreclosed properties offer high profits and low risk for those who can buy and flip repossessed properties.
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In the past, I would buy bank repo houses for sale assuming that I could fix it up and sell it. So I’d buy the property, fix it up, put a tenant in and they would move out. So I was forced to fix it up again and go through the same motions
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Once you understand your foreclosure laws, you can better speak with your clients and others involved in a short sale. It makes things more comforting for everybody to know that they are working with someone who is knowledgeable.
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