How much is their money really worth???

Question

Hi All,So I have a meeting with a silent investor this weekend and I am about 80% of the way done with my presentation. -This proposal will outline my complete business model. -State what level of commitment I am looking for and for how long.-What their expected ROI will be.I am sure a lot of people in the community have put something like this together and I want to know what a good fair ROI percentage is for my investor? They are a capital investor only and I want to be fair without giving away the farm LOL.Thank you in advance,

Ned Carey · Answer

It is all a negotiation. How sophisticated is the investor? Someone with experience in lender to real estate investors, knows they can get 10-15%. A less sophisticated investor may think 10% must be a scam - it is too good to be true.

Jeff Rabinowitz · Answer

@Ned Carey is absolutely correct. Make sure you know your situation also. How much can you pay and meet your profit goals? How many other options do you have? If this is your first private lender and they indicate they are willing to fund you it may be foolish to turn them down over a couple points. Those points may reduce your profit but if that is your only source of funding, turning it down may mean you make nothing. Remember, those who offer to fund your deals will almost always have more funds available than they are offering on your first deal. They likely know others, maybe several others, who might also be willing to fund your deals. Treat your early investors well and you may not have to work very hard to find funding in the future.

James Mc Ree · Answer

@Jeff RabinowitzI wouldn't recommend that pitch to a stranger like you at all (nothing against you - just someone I (and OP) don't know). The OP said his partner was his mentor and a family member, someone with presumably a strong relationship. My first suggestion was to ask what the lender wanted. I specifically said said not to jeopardize the relationship. We don't know the depth of that relationship so I gave a few options. I think it is perfectly reasonable to a close family member.Jim.

Jeff Rabinowitz · Answer

@James Mc Ree, if someone without much experience or with no experience tried your idea of acknowledging the going rate is 10-15% and asking for 8% with me my response would probably be similar to: "no and don't bother to contact me again". The funding partner is the one who is taking the chance of loss here. Your presentation could blow the relationship up immediately. Even if the borrower makes a better pitch later, if they fish in the same pond, when the other lenders in the area ask me if I know the investor--when I relay the story of our encounter it would probably give them pause and lead to more rejections. Do not try to get a bargain before you establish that you can deliver on your end. You can't do that until you have put together a series of profitable deals.

James Mc Ree · Answer

You could ask your potential investors what they need as a return for their investment. As mentioned, 10-15% might be the professional norm, but you might be offered a family discount.Your investor might say, "Pitch me!" In that case, you could acknowledge that 10-15% is the norm and that you are asking if the investors can do better, such as 8%, if you have a strong pitch (ie. low risk). You don't want offend and you do want to get a deal. Remember that this person is likely to fund future deals and saving a percent now might come at the expense of future deal funding. Think more "partner" than "lender".Profit sharing may be something you could safely offer in conjunction with a lower interest rate if you were comfortable with that.Jim.

Rosston Smith · Answer

I would shoot for 8%. Right in the middle.

John Thedford · Answer

Consider being a borrower and not taking in an equity partner. You will more than likely need skin in the game but many private lenders are happy to receive 6%-7%. Those types of lenders are often happy to write loans for a few years...maybe up to five years or so. If you take on a HML, rates will be much higher and loan terms are generally much shorter. It depends on whether you want to buy and hold or flip. My HML borrowers are flippers and are generally in and out within a few months. The lenders I use for private money aren't interested in ownership, only making a return on their money they can count on for months to come. Both HML and PML serve a purpose depending on your needs.

Angelo Goodwin · Answer

@John Thedford well said, based on the feedback I have received I am in the right ball park with what I was thinking initially.

Angelo Goodwin · Answer

@Ned Carey @Jeff Rabinowitz This investor is a family member who has been doing real estate investing for longer than I've been alive so he is really giving me a shot to break into the game after earning his respect and trust, through my hard work and passion. He is my mentor so I want to make sure I continue to prove my worth. I am sure he already knows the numbers and this is more of lesson for me so I am doing my diligence with this because I don't want him to think I am taking this lightly because of our relationship. Thanks for the insight fellas it will really go a long way!