To meet their loan-of-value ratio (LTV), almost all lenders require that borrowers have some "skin-skin" or equity in each fix-and-flip project . How do you get the prepayment you need to get a solid money loan qualified by a real estate investor who just started a business or a real estate investor tied to another project?
Friends and family: logical start
Friends and family are the best places to depart when asking for help with money. You may know that they have a track record with them, work with them on other types of projects earlier, and have permission to suggest your transaction.
Lay out your suggestions: risks and rewards
Please prepare a detailed analysis on specific investment opportunities before you approach friends and family. Be thoroughly investigating the project and being very clear and honest about pros and cons, about related risk corrections and flipping of success.
Next, we will formulate a business plan that clearly specifies the project timeline, plan milestones, and budget as well as the planned partnership, joint venture or investor relationship conditions. Approach the entire process like business relations.
Real estate partners offer opportunities to fund specified modifications and flip projects in exchange for the designated ownership percentage for designated families and friends. As a stock partner or investor, your family and friends get the opportunity to receive the money generated by the property at closure. While they have investment risks, they will be in a position to benefit from the sale of assets.
Partnership considerations
· Legalize your arrangements. This is a business partnership and should be configured accordingly. The most common way to build these partnerships is general partnership, limited liability company (LLC), limited partnership, or enterprise. Consulting with a lawyer specializing in real estate partnership provides valuable information on the process and type of agreement best suited to your situation.
· Establish the role of each partner or investor clearly. For example, your friends and family can contribute the cash required to pay the initial prepayment and the closing costs, but to ensure the remaining financing, purchase of property, and management of all construction I will be in charge. Alternatively, your partner can play a more active role in the daily work of renovation. Please clearly fill this in advance.
· When setting up a partnership, decide partnerships and aspects of transactions to include in the split. As a partner, your family and friends can participate in all aspects of real estate ownership. This allows you to receive a percentage of the specified ROI, such as property appraisal, loan refund, cash flow, money from the sale of property. Adding partner funds reduces the amount of the construction loan, so you need to consider it when deciding what is included in profit sharing.
· Determine how to divide NET (profit or loss). In determining profit (or loss), do not forget to include all costs: fees, refinancing costs, and all acknowledgments. There are many ways to divide profits, but there is no right way. It all depends on how much money each party pays for the transaction, how it is divided, whether the risk is the highest, and so on. The scope of split is 50/50 to 80/20 based on the above factors and agreement of the parties. The key is to determine split in advance and formalize.
· Summary of conditions for reporting tax income (or loss) of each party.
Performing the above steps will give you a chance to succeed in the partnership. This will be the foundation for many real estate transactions that will be successful in the future.
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