Investor pay-back structure

[Paul R Schiller]

Hi everybody :) ..... I currently own a 15 unit building and am currently seeking more properties. Since I didn't use any outside investors on my first one, I'm looking for some feedback on the next purchases. I have some partner-investors lined up who are willing to put some money in the pot to make the next purchase(s) happen, but without utilizing this before, I'd like some pointers. How are you who have used investor money, structuring your paybacks to the investors? I.E. if the property to purchase is $1m, down payment is $200k, and I have 3 investors putting in $50k each totaling $150k, and I use $50k of my own money, what are some optimal ways to setup the payback of the $150k outside money back to each investor, in the best/quickest way so we can roll into more properties at the fastest rate or deploy the money elsewhere, quicker? (Assume all outside money is just that, money, and these outside investors won't have any active roles in operating/managing any of the properties.) Any and all feedback is much appreciated. Thanks ;)

[Michael Wagner]

My first choice is to always go with a fixed rate of return...so say  10% on their money.  If that cant be worked out, I like to dole out equity proportional to the amount contributed.  So if they put in 5% of the capital required to do the deal, they get 5% equity....and perhaps a fixed preferred return on top of that...say 4% interest only...so they are making 4% on the money from the start, get 5% of the cash flow and 5% of the back end equity.  I've used these strategies in the storage world with good success.  These days, I find that a proportional amount of equity is enough to get the investors a great return and actually flirts with the "too good to be true" objection.  Our last round projected a 18-22% return annually over 4 years.  The property will hit our 4 year value projections in under 12 months!!!  They are happy .... as am I.  Just some ideas to think about.  The sky is really the limit.  To me, the best course of action is to structure the deal so that it meets the investors objectives....some will want fixed return with less risk....others will tolerate a bit more risk for added upside.   And you can mix and match, not each of your 3 investors need the same structure.  Keep us posted on how you progress!