Blue Springs, MO · Member since 2014 · 353 posts · 52 votes
I am in the process of upscaling my business. I have worked as my own property manager for a bit now and I officially have my 'system' in place. So now I want to 10x this business. This is where using other peoples money comes into play. I feel good about hunting down the deals on these bigger multi-families, but have some questions about the cash.
I would rather use outside money sources than friends and family. I want to basically borrow the 20% dp through my llc, purchase the property, manage, value-add, etc..., then refinance 3-5 years down the road and buy out partners. Im thinking the terms are...least control legally possible by limited partners, and 8% return on their investment, 50-200k investments. Interest paid quarterly. At the end of three years, they get paid at least half of original investment and at 5 years they get anything remaining. But how do I find these people? I know their are some legalities involved.
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
7y
@Reggie Maggard Generally, any investor in second position is going to want you to have at least some money in the deal, a deal structure so they can act and protect themselves if things go south, and one of two things:
(A) An interest rate quite a bit higher than 8%. Say, 13% or so, depending on the risk in the deal or...
(B) An equity interest or waterfall so they participate in the upside.
You're going to have more luck getting what you propose with friends and family because those people (1) like and trust you already and/or (2) want to help you and/or (3) aren't as sophisticated with their money - they don't know as much about available opportunities as experienced 3rd party investors do. Social capital has real risk mitigation value for both borrower and lender.
I'm not saying you can't run across someone who will or cultivate relationships so that people will lend at 8% in second position, but it's hard to scale that way. If you access the general market of investors who have experience doing this, it's going to be more expensive for you because other sponsors (your competition) are offering much more attractive returns than a simple 8% interest return.
Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
7y
The first question is what specifically are you bringing to the table? People with money are interested in knowing what the experience and track record of the borrower is. How much are you putting into the deal? Lenders, partners, whatever you want to call them are looking at risk and reward and weighing them against each other.
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
7y
@Reggie Maggard Generally, any investor in second position is going to want you to have at least some money in the deal, a deal structure so they can act and protect themselves if things go south, and one of two things:
(A) An interest rate quite a bit higher than 8%. Say, 13% or so, depending on the risk in the deal or...
(B) An equity interest or waterfall so they participate in the upside.
You're going to have more luck getting what you propose with friends and family because those people (1) like and trust you already and/or (2) want to help you and/or (3) aren't as sophisticated with their money - they don't know as much about available opportunities as experienced 3rd party investors do. Social capital has real risk mitigation value for both borrower and lender.
I'm not saying you can't run across someone who will or cultivate relationships so that people will lend at 8% in second position, but it's hard to scale that way. If you access the general market of investors who have experience doing this, it's going to be more expensive for you because other sponsors (your competition) are offering much more attractive returns than a simple 8% interest return.
United States · Member since 2015 · 401 posts · 394 votes
7y
@Reggie Maggard first of all, what you're describing is syndication. There are a lot of legalities involved, not just some. You're looking at $10K minimum just to structure these deals. Some attorneys will do it for less if it's a smaller deal. 100% talk to a securities attorney before moving forward.
In terms of structure, I agree with @Justin R. You're going to have a hard time finding investors with the structure you've outlined above. Some of the biggest, longest tenured and most successful Syndicators out there structure with an 8% preferred return and a 70/30, 60/40 or 50/50 split after the preferred return, and no buy out. I would consider restructuring if I were you; minimal experience (relative to others in the space) means that you need to find a way to make your offer more appealing, on top of other things.
Rental Property Investor · Central, FL · Member since 2016 · 950 posts · 821 votes
7y
That's where I'm at. The limiting factor is having the cash especially if you don't want to have 100 different JV's going on but don't have the desire or business model of doing a syndication.
The faster you can take your cash flow and use it for down payments yourself the faster you can 10x your business.
For me my cash flow is not to be touched for personal use for 5 years. So I have 5 years to use it for downpayments. The faster I can acquire properties the faster I can get to my goal.
Attorney · Los Angeles, CA · Member since 2016 · 284 posts · 314 votes
7y
One big problem with what you propose is that you're trying to get 100% financing. Few people have that kind of appetite, so typically how these deals work is that the equity portion is syndicated out to investors, but they're equity investors and get a piece of the upside--they're not debt investors.