How Equity Participation Loans Increase Private Investor Profits

Performance Property Real Estate Question

Q: Our friend fixes and flips houses and he offered us the opportunity to invest in his next project. What’s the best way to get compensated? Curtis, Scotch Plains, NJ

A: As a private money investor in a real estate fix and flip, you can be compensated with interest for the time period your money is being used, you can be compensated with equity which will give you a % of the final profit, assuming there is a profit or you can be compensated by a combination of both interest and equity. You can formalize your stake in the profit derived from the transaction in an equity participation loan agreement which spells out how and when you will be compensated for your equity share in the property. Your written agreement should also include contingencies that address things that may happen during the course of the fix and flip like cost overruns or if you have to replace a contractor or have trouble finding a buyer after the renovation has been completed. You should do your best to identify as many possible things that can happen during the life of the transaction and address them all in the written agreement you negotiated and sign before the transaction begins so that everyone is on the same page. Thanks for your question, Curtis–good luck!

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