subject: Partnering On Real Estate Deals Can Save Your Profit Margin [print this page] When flipping houses for profit, I have heard never to split the profits with a partner at 50/50. Instead you should offer 15 or 20 percent interest.
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.
Lets 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. Dont turn your nose up at it.
