Partnerships or a Loan?
We get asked all the time, "What's better a partnership or a loan?" This question usually comes after someone ask how we set up our partnerships. Our model is not set up like a hard money lender. They typically have some points up front, a few weird fees, and then offer under what the property is worth, leaving the investor to put some skin in the game. Our model, is a partnership. It puts us into the risk with our investors. If the deal profits, we split the profit. If it loses or doesn't get what we predicted it would...well we don't do so well. So what is better? There is a place for both, but in a hard money or loan situation, the investor is on the "juice" from the moment the sign. We had a client have both scenarios going on at the same time. His hard money loan was for 150k property, he had to come with 35k to closing and they provided 120k, interest only for 1 year. So he had a 1000 in interest every month, until it sold. Not to mention, he had to cover any improvements. So he had an outlay of 55k in cash wrapped up and made 19k profit. He had a couple of 8k deals funded with us. Both sold for 28k and 35k respectively. No money out of pocket, and cleared about 24k in profit. As an investor you should ask yourself several questions....What is a better return? Where is my limit on deals? What can I handle? How many times can I turn it? What's my risk? His total cost on the hard money to make 19k was $4,800, risking 55k out of his pocket. He made 47k, splitting 50/50 with his partners, walking with 24k. $0 of his money at risk or out of pocket. So the riddle of the day, did that money cost him anything to make? Let us know what you think!