Finding limited partners that aren't friends and family

[Reggie Maggard]

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.

Thanks

[Justin R.]

@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.