What is a fair ROR to offer an investor these days?

Question

Hello,

My husband and I live in a rental in Orange County, CA.  We would like to buy the house, demo it, build from the ground up and sell it.  The cost of purchasing the property plus re-building is not in our budget so we need a loan from an investor.  We would need to borrow approximately $1.2m to complete the project.  It would take approximately 9 months to 1 year to complete.  What would be a fair interest rate (simple) to offer the investor?   Thanks so much!

Account Closed · Answer

@Stacey Wilks

Sorry I have to agree with @Richard C.

You are asking to borrow 1MM and you don't even know market rates. That screams "I'm a rookie" People that lend 1MM are sophisticated investors and I don't know any that would lend in this situation.   This is an extremely risky investment and not even 10% would be  be adequate interest. Furthermore the advice was given by Richard was in order to be helpful. Real estate is  rough tough business. If you can't handle it seek another profession.

And yes this advice is coming from a private investor.

Good luck

Richard C. · Answer

You say, "rude and discouraging."  I say,"direct and realistic."

There is such a thing as a market price, for anything. That is as true for loans as it is for the catch of the day at your local seafood place. And that price goes up as a deal gets riskier, but it doesn't really go down.

5% is 30 year fixed conventional loan territory, not risky spec build territory. Sorry, but it just is. Even if you were putting in 30% of the money, you should expect to be paying 10% or more on the remainder. Plus several points up front.

You're asking for the sea scallops for 99 cents a pound. It doesn't work like that.

Richard C. · Answer

I give up.  Good luck to you.  You'll need it.

Stacey Wilks · Answer

@ Steve L.

THANK YOU - finally someone who has something to offer to this conversation.

We do live in the house and she (our landlord) has given us an idea as to the number.  She is a sharp, elderly woman who grew up in this house since she was a child.  The property has been paid off for decades so she can name her price.  We've lived at this property for 7 years and she loves my husband because he's done numerous improvements to the property, mostly at our cost.

1.  Her soft price is well below Zillow of $809,000.

2.  We would like to do this project not as a 50/50 split between us and investor, but just as a straight interest rate of return of 10% for the investor.  Did I answer that correctly?

2a.  Yes, as mentioned before, the investor would be 100% on title.

2b.  Yes, agreed.  My husband is always on deadline, usually earlier.  As far as budget, yes, he's always on budget and has been known to....well never mind, you wouldn't believe me ;)

"A title search of other investors" - not sure what you mean....she solely owns it in it's entirety.  As I said earlier, she said she would give us first chance at buying it.

As far as 10% and the "friends/family" category -

Why wouldn't 10% be enough for a RE investment of that size?  Are there other RE investments that would yield more than that (other then Texas Redeemable Tax Deeds of course)?

And we would never, ever, ever do business with friends and/or family....unless of course, we would never want to speak to them again.  It hardly ever works out, but I guess there are exceptions.

Thank you Steve L.  Your input is well received.  Just wanted honest answers without the attitude....it is so appreciated.  Have a good night.

Richard C. · Answer

So you have no money of your own, don't own the existing property, don't own a home you can put up as collateral, and want to borrow a million dollars? At 7%?

I don't want to be mean, but there is no way in hell that is going to happen.

How many similar projects have you completed? How much experience as a GC does your husband have?

Account Closed · Answer

@Stacey Wilks I do lend money but even at much smaller sums (like $100K) lending to people who have flipped over one hundred homes, I generate almost 18% per year. You are asking $1M with no skin in the game for 10%. No one here thinks thats likely. The fact you are still posting here indicates the market agrees and no one else has stepped up to your "incredible, no risk, cant lose" deal either!

Stacey Wilks · Answer

Richard, I don't need luck.  I'm confident with my numbers.

And @Anish Tolia, we will find an investor and not one that charges 18% on a million dollar loan.   $100k and $1m are two very different numbers.  An $18k return versus $100k return?  Sorry, no contest.

Signing out - have better things to do.

Stacey Wilks · Answer

I am listening, I simply don't agree.  Based on your last post, you are making assumptions and you have most of them wrong.  We know what it takes to build a house.  My husband isn't your typical Contractor.  He knows how to build a house quickly and cost-efficiently.

If you already have plans, you can have an engineer(s) stamp it with not that much money.

"Build entire new house, worth more than $1m" - in this area, the land is the valuable part of the property, not the structure.  We could build a very nice, 4/3 house (with a huge backyard which is rare in this area) and still make a profit.  The existing property now is worth $809,000 with the land valued at least $700,000.

Closing costs are not a concern.  And we are going to negotiate the buyer's agent's commission down to 2% - they will do that all day long and still make really good money.  We will sell the property ourselves with the help of a company that specializes in FSBO for a fraction of the typical 3% agent fee.

My husband will retain his job, hire his best subs and oversee the project everyday.

And how do you know we will not make a profit?  You don't even know what the house will eventually sell for.  I do.  I've done the comps.  I know this area.  We will sell it for slightly under market and I guarantee you that it will sell within 30 days.  Also, the market is only going up so we will have wiggle room.

I believe 10% is fair but if it takes a couple more percentages to get the deal done, then we will do it.

And BTW, I wouldn't trust a project like this to anyone but my husband.  He will have complete control of the project, not the investor.

Richard C. · Answer

Let's sketch out some numbers a bit.  Really rough, as I am not in your market.

Let's say you can buy the place for $600k.  You borrow a million.  So you have $400k left to do the following:

1.  Tear down existing house;

2.  Permits and planning;

3.  Architect/engineer;

4.  Build entire new house, worth more than $1 million;

5.  Pay closing costs (twice!) and realtor's commission on eventual sale;

6.  Live for a year while your husband makes no money at other work;

7.  10% on the borrowed money;

8.  Your profit.

There is nothing there.  There just isn't.  I'm sorry.  Ambition and creative thinking should be encouraged.  But reality is reality.

Richard C. · Answer

Why ask for help and opinions if you are unwilling to listen?

10% is not enough.  Everyone has told you that.  If I am a private lender in California, and I can make 10%, PLUS 4 points up front, lending at 65% LTV, and have borrowers lining up at my door, why should I go with your project?

Are there other real estate investments that could yield more than 10% COC return?  Absolutely!  Tens of thousands of them!

Look at it this way.  What are you bringing to the project that an investor cannot get cheaper elsewhere?  The answer is the lead, on the the property that your landlord may be willing to sell you at a below market price.  Your husband as GC?  Why wouldn't an investor simply hire a GC, and end up paying for less while having complete control?

"We would like to do this project not as a 50/50 split between us and investor, but just as a straight interest rate of return of 10% for the investor.  Did I answer that correctly?"  You answered it correctly, but Steve wasn't asking a question, he was giving you a suggestion.  Specifically, that an investor would not be interested in 10% interest, and that if you want to find the money, you are going to need to do something like what Steve suggested, and take a share of the eventual profit.  A share that will almost certainly be LESS than 50%, by the way.

Steve was suggesting that title searches on similar projects would reveal the names of the investors involved in those projects, and provide you with a list of people to approach.

What is a fair ROR to offer an investor these days?

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