There are many ways to make a killing in real estate. There are even multiple ways to do it by flipping houses. You can partner with silent investors, you can partner with realtors, or you can wholesale houses to others that rehab them before the flip. However, one of my favorite ways of flipping houses is partnering with a general contractor.
Advantages of Partnering With a Contractor
Partnering with a general contractor works particularly well when you are struggling with the 70% after repair rule. That’s when your maximum allowable offer is 70% of what the house value will be after repairs are made.
The idea here is to bring in a trusted general contractor as a partner in exchange for making the repairs. This might be a 50/50 partnership if he provides the materials and labor. Or it might be something less if he only brings his labor to the deal. Either way, your costs to rehab the house go down considerably, meaning you can skirt around the 70% rule.
Always Run the Numbers
Regardless if you are partnered with a general contractor, you still need to stay within the 70% rule. It’s just calculated differently. Let’s say you find a house in a good neighborhood that is darn decapitated. The after repair value is $175,000 but the cost of repairs will be $50,000 if you have to hire a general contractor. The seller will let it go for $80,000 but not a penny less.
The $80,000 selling price plus $50,000 in repairs totals $130,000. This makes the sales price plus repairs at just shy of 75% of the after repair value. Normally you’d have to pass on the deal because it exceeds your 70% rule. But if you can bring in a general contractor to make the repairs in exchange for part of the profits, the deal can go forward.
By your estimates, the repairs require $30,000 in materials and $20,000 in labor. The $20,000 is the general contractor’s contribution to the deal. Your costs are now the purchase price and the materials for total investment of $110,000. That is 62.9% of the after repair value. Well within the 70% rule.
The contractor’s labor contribution is 18.1% of the value of the deal. You’re going to need to sweeten that amount a little to make it worth the contractor taking part of the risk. Otherwise, he’s be better off just doing the work and being guaranteed of collecting the money. You might offer to partner for between 20% and 25% of the after repair sales price. At 20%, the contractor would walk away with $35,000 on a $20,000 investment. A good deal for the contractor. As the investor, you walk away with $140,000. That’s about a 32% profit on your investment. You stayed within the 70% rule and shared the investment risk. Always run the numbers but partnering with a general partner can make deals doable that otherwise you would have walked away from.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.