Characteristics of equity partners / private money lenders

[Erik W.]

I am an experienced land lord of SFHs and plexes and have done the occasional flip.  Now I want to move into multi-family residential investing.  Initially, I'm looking to take down a couple of "smaller" deals (30-50 units) and then if all goes well move into larger scale projects.

While there are many podcasts and blogs on sourcing private money I haven't found anything specific on the capacity of the money providers themselves such as:

1) What is the minimum investment amount I should require from a money provider that makes the most sense for apartments?  I don't want to end up coordinating with 40 partners who each chip in $5,000 just to make a down payment on a smaller apartment complex.

2) Liquidity / time it takes to access funds.

3) Length of time I should require the funds to be invested in the deal before we "Cash out / Buy out" any one person or the whole deal.

In general, I'm thinking that the bigger the deal, the larger amount I'd want to ask for from each investor and the term to leave it in the deal would get longer.  Any advice from experienced investors or links to resources are appreciated!

[Trevor Ewen]

@Erik W.

What most people here have said seems fairly accurate. I can give you my perspective as one of those money providers (and not a sponsor). This way you can structure it nicely on both sides:

1) $50k is common for deals chasing retail money. I see a lot of $250k and $500k for accredited only deals. Obviously someone giving money is happy for a lower bar (I will invest $100 if someone lets me). In the end it's about your cost, but I definitely like to try out new partners with the smallest amount possible.

2) Investors will give you anything from a week to three months. You also have to buffer for people who inevitably can't close (you know these types of people, they always cancel dinner / events the night of). The three months case is usually when they are rolling over one transaction into another. These are a different kind of risky, because things outside their control can go down. I funded a loan recently and the money was contingent on the sale of another duplex. Thankfully, there was a two month gap between the close and the loan funding, so ample time for notice.

3) I see anywhere in the neighborhood of 5-10. But I have (so far) not been in anything that ended earlier than anticipated (except for my own investments). The big question I want to answer is 'What if we don't hit the target date?" I just want to know we can keep producing income and don't have some huge cliff (i.e. payment or tax re-assessment) we will fall off of.

You are asking the right questions, and I do think that redounds to your benefit in this process. Different models work well for different investors. I would be cautious of anyone who tells you "The one true way to structure these investments." Everything in investment is a tradeoff that is made for the purpose of attracting / repelling a certain type of investor and keeping your operations manageable.