I am getting into rehabbing properties and have an investor that is willing to finance the deals. What is the best way to secure there investment? Should I give them the trust deed? What type of contracts should I use and what is the best way to hold title to the properties? Please advise. Thank you.
Hi,
We pretty much use our own cash now, so don't need investors today, but there have been times I have used investors very profitable.
There are four parts to rehabing:
First purchasing a property - If you buy it for say 90k (FMV $190K) you first need to decide whether you use Hard Money for financing or pay the whole thing in cash.
We use hard money so we would have our lender place a 1st TD for $63k in place with 30% down or a $27k down payment. (Remember there may be closing costs for the original purchase so remember to factor this in.)
Second part is your rehab costs - In the case of my example property above the rehab budget was $50k
Third part carrying costs - Our hard money is at 18% so payment is $950 a month and utilities and insurance and yard and pool care run $350 per month, so we budget for up to 2 months of construction and 5 months of overhead or roughly $9100
Fourth part is cost to sell - Full price offer has $9.5k in realtor fees (5%) and $4300 in closing costs including taxes
So profit projected in this deal would be $27,100
What I have done in the past is either put my investor in first position for all cost’s of $142,500 and what I have done is give my investor say 40% of the profits against the note in first position.
Or put the investor in 2nd position for an investment of $86,100 and offered the investor 30% after paying and servicing the hard money 1st.
Now I guess the determing factors going to be. Does your investor have enough capital to say do a property and do a second property while the first one is on the market? And does your investor have enough capital to do either one? Or would your investor be more comfortable in 1st position on the first property? Can you even get hard money in your area quickly and reasonable? Does your investor want to make all the capital available or give you draws? How is the money controlled?
Make sure you use very conservative numbers as it is better to make more profit than expected at the end than to have to go back and increase the investment and don’t overbuild for your area!
Good luck,
GR