How to Structure a House Flip Deal With a Private Money Partner or Lender

How to Structure a House Flip Deal With a Private Money Partner or Lender

Imagine earning an extra 67 percent of profit ($50,000 instead of $30,000) simply because you structured a flip transaction one way versus another. Some simple strokes of a pen on paper could make the difference in how much money you get to keep. Read on to explore how to maximize your return on investment in a deal using private money.

I am asked all the time by others how to structure a deal.  In my younger days when I didn’t have a lot of my own money, I obtained funding for dozens of my deals by involving private money partners or lenders.  Depending on how you set it up, you might be able to keep more money for yourself while still making your private money partner or lender happy.

First, you will want to establish a relationship with a cash investor who wishes to invest their money into a real estate deal.  There are a lot of people out there with capital.  For instance, I worked with business owners who did not have the time to look for and manage real estate deals.  Instead, they wanted a trusted professional who could discover deals, manage those deals, and serve as a good steward of their money.  I also worked with independently wealthy retirees and those who sold a profitable business. Consult with your attorney about how to promote investment opportunities to accredited and non-accredited investors.

When talking with the potential private money partner or lender, you want to gauge how they prefer to set up a deal with you.  You should tell them the way that you prefer to work.  You may have noticed that I used the words partner and lender.  Let me clarify those terms further.

Partner:  It essentially means they want a lot of control and a sizable percentage of the profits.

  • They might want to be on the deed with you.
  • They might want to be a fellow member in a Limited Liability Company (LLC) or other entity with you, whether as an equal decision-maker or as a limited partner.
  • They might want to invest 50-50 with you, with each party contributing half of the money.
  • They may contribute other things in addition to money, such as bringing in their contractors or employees to do some of the renovation work, or perhaps serving as the real estate agent.
  • They may want to create a joint bank account, and perhaps have joint credit or debit cards.

Lender:  It essentially means they are acting like a bank.

  • They may want to hold a mortgage and note to protect their interests if you default.
  • They likely want you to pay them interest and maybe points or fees.
  • They likely do not have control of the project.
  • They typically will only loan the money for a limited period of time, like six months.

If you are a partner with someone and they have control, then you are not the only one making decisions.  You will likely have to compromise, perhaps a lot.  You may have disagreements, even ugly ones.  A partner could also obligate the business.  For example, your partner could purchase items on their card that are far more expensive than you expected.  They might sign a contract without your consent.  They might write a check, even a large one, without your knowledge or consent. 

A partner could have entirely different standards than you have.  For instance, they might attempt to renovate the house to a level far higher and more expensive than needed.  Or they might take much longer to do what they said they are going to do.  They might even say they’re going to do something and then do something contradictory to what they told you they would do.

The inverse could also be true.  A partner may share your standards and be quite agreeable.  They might bring expertise and connections to the deal that improve the bottom line.  They might notice things that you don’t see.  They might even push you to work more efficiently.

When someone is a lender, that typically means you have full control of the project.  The potential for conflict is probably much lower.  Your standards prevail.  They are not able to obligate the business.  If things go according to plan, they will not foreclose or take other legal action.  In other words, the deal is set up where they pretty much stay out of your way.

In many cases, there is no need to set up a formal partnership (create a company and set up bank accounts) until you have that first deal to work on.

In a partnership, you might be giving up more money in terms of a percentage distribution.  Here are some examples.

Partnership where they put up 100 percent of the money and have 50 percent control and 50 percent profit. 

In one partnership a number of years ago, we set it up this way.  I found the deal, negotiated it, hired the contractors, selected the Realtor®, and attended the closings.  My partner had his LLC on the deed along with my LLC.  My partner wrote all the checks.  He came out to the houses from time to time to see how things were going.  We talked a lot on the phone.  When we sold the houses, first he received all of his money back and then we split the profit 50-50.

In a relatively similar partnership with another partner, I did the work above yet my LLC owned the property.

In another relatively similar partnership with another partner, I did the work above and made the partner a member of the LLC I used.

Partnership where they put up 100 percent of the money and have limited control and 50 percent profit.

I had some partnerships where they put up all of the money and had limited control.  Realistically, someone with limited control has no control.  In some partnerships, I added them to the LLC as a member and in others, they became part of a Limited Partnership (LP).

Partnership where they put up 50 percent of the money, have 50 percent control and 50 percent profit.

I created an LLC comprised of my partner’s LLC and my LLC.  We each invested half of the money needed.  My partner did some of the work and I did some of the work.  We both worked to find deals.  We agreed to hold an auction to sell each of our deals. 

I had other partnerships in which I had between one and four partners.  In most cases, I created an LLC in which each of us was a member.  In one case, I created a C Corporation with each of us as an equal shareholder.  In each of these instances, we invested equal amounts of money.

Partnership where I put up 100 percent of the money to acquire the house and the partner was supposed to handle 100 percent of the renovation work and renovation costs.

I had a partnership where a contractor wanted to work with me to fix and flip a house.  I found and negotiated the deal.  I put up all of the money to acquire the house.  My company and the contractor’s name both went on the deed.  The contractor was supposed to buy the materials and do the work.  This deal structure was a failure from the beginning, and I should have seen it coming.  The contractor only wanted to do renovation work on certain evenings and weekends when he wasn’t busy working on other projects for paying customers.  For our project, he bought substandard materials, including used materials that he pulled out of houses he was renovating for customers.  He took months longer than anticipated to perform what little work he did.  Eventually I had to pay him $5,000 to get him to agree to remove his name from the deed.

Lender relationship where they gave me money and expected a fixed amount of interest.

A private lender told me that they would give me $160,000 for up to six months.  They said they wanted me to get them $170,000 when the house sold or in six months, whichever happened first. 

Lender relationship where they gave me money and expected monthly payments.

A private lender gave me money to use for a year and wanted monthly interest payments along with a balloon payment at the end of the year.  That allowed me some time to do more than one flip, assuming that a flip project takes three to five months from purchase to sale.

Lender relationship where they loaned the money as a mortgage with a note.

Several lenders loaned money for specific properties and held a mortgage and note.  They wanted their principal and interest paid upon the sale of the house.  That way I did not have to make any monthly payments.

Money chases deals.  After you have a general idea of who your private money partner or lender is and what type of deal structure could work, next you need to find a lucrative project with significant potential profit.  In a seller’s market, you will likely have to make quick decisions on opportunities that come along.  Assuming that your partner or lender wants to do that deal, you must quickly set up the structure between you and them.  How you do it can make you a lot of money.

For example, let’s say you have a $60,000 profit on a flip.  If you have a 50-50 split on the profits, you and your partner each make $30,000. 

What if you structured the deal where your private lender was to receive $10,000 in interest instead of a 50 percent share of the profit?  So, on the same deal with $60,000 profit, you would receive $50,000 and your lender would receive $10,000.  Perhaps your lender would be quite satisfied with the return of their principal plus $10,000, particularly if that is how the deal was structured from the beginning.

So you might do the same amount of work on a deal, and depending on how you structure it you could earn either $30,000 (with a partner) or $50,000 (with a lender).

Alternatively, what if things went wrong on a flip?  If you had $0 profit, then neither you nor your partner would have made any money.  They share some of the risk.  Whereas if you owed $10,000 in interest to a lender and had $0 in profit, you might pay $10,000 out of pocket to the lender when selling the house.  In essence, the lender is willing to accept a potentially lower return on investment in exchange for a near-guaranteed amount of interest. 

No one expects a real estate deal to fail, yet I have been in these situations before despite my best intentions. Overall, if I were to engage in a private money deal again, I would prefer to structure it where the money comes in the form of a loan.  That way I would maximize my profit and retain total control of the project.

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Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania.  He became a full-time real estate investor in 2004 after serving in the U.S. Navy.  Tai has made colossal mistakes in investing (and learned some things along the way).  He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Tai may be available for coaching and speaking engagements on a variety of real estate topics.  Send an email to

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