What should be a return for an investor?

Question

I am looking to make an offer to an investor to help with down payment. He is not a big investor just knows his money should be doing something. What is a good offer to make it sound good as I am looking for half of the down payment. Thanks.

Dan H. · Answer

Not sure how you got 7.3%.  That is less than 4% per year.  Does he want to lend me money at this rate?  Seriously that is too low and if you took this loan (assuming it was not given for sole purpose to help you out) it would be taking advantage of someone that does not have a decent understanding or risk/reward. I would not take advantage of the lender.  Also if you treat the lender right, maybe he will fund future needs.

Good luck

Travis Williams · Answer

@Dan Heuschele my thoughts exactly.  I appreciate the honesty and transparency BP community shows!  Account Closed  Im in similar situation with much higher risk and capital need (let your investor know I would love to work with him too lol). My inquiry is are you financing via conventional loan?  If so what qualifications were needed to get loan approval or did they approve you for simply having the 20%?  Or did you get preapproved before partnering with investor?

Erik W. · Answer

Account Closed, hi and welcome to BP!

I saw your update.  Btw, you don't need to "tag" yourself on replies.  That's what the "@" is for: it creates a notification so one of us knows you're talking to us.

When you say the investor wants 20%, that means most of us are thinking 20% APR.  But as you have demonstrated, it's actually not 20%.  It's more like 4% annually, simple interest (not compounded).  Think about it: $10,000 total interest / 5 years = $2,000 per year.  $2,000 is 4% of $50,000. That's dirt cheap by any standard, especially if you're a newbie and haven't done any deals yet.  I'll show you what I mean.

Most "hard money" lenders (i.e. the money is loaned against a "hard" collateral, like real estate) in my town want between 8 - 12%, plus they ask for 3 - 5 points up front.  A point is simply a percentage of the total loan amount, usually deducted from the actual loan proceeds.  So to give you an example using your $50K.  A hard money lender says he wants 9% and 4 points up front.  At closing the loan, I would receive a check for $48,000.  The loan balance would be $50,000 @ 9% interest only compounded yearly.  The $2,000 take from the loan check was the points (i.e. 4 percent; aka 4 "points").  Then let's say I paid him back after 12 months.  He would receive a check from me for $54,500.  That's the loan balance ($50K) + 9% interest ($4,500).  Added on to the points I paid up front ($2,000) he has a total profit of $6,500 from his investment.  That works out to 13% total ROI.

Your investor is asking for far less than market rate.  Be sure he knows what he's getting into, the risks, the rewards, etc.  And be 100% sure you get him paid back.  He's doing you a huge favor offering money this cheaply, as demonstrated above.

Evan Polaski · Answer

Account Closed, there are a lot of factors.  As noted by Michael and Greg above, risk tolerance is important, so equity or debt, pay back structure, timeline of investment.

I would approach it more as a fact finding mission (soft ask at first).  Let him know about the deal, how the numbers are working in general, what your business plan is.  Then bring up that your sticking point is not having all the cash to close.  From there, you go in to Greg's advise and ask what type of structure/deal he would look for in that scenario.

He will likely be able to read between the lines.  And from there, you ask if he would be interested or if he knows anyone that might be interested.

Account Closed · Answer

@Ian Nixon so he said we wants 20% return and nothing to do with the house or renters. So he gives me $50,000 he wants $60,000 back in 5 yrs. That's about 7.3% a year. This seems pretty good.

Greg Dickerson · Answer

You should start by asking what type of returns they are looking for and go from there. Most people I know are looking for 8-10% these days.

Michael Ealy · Answer

It depends.

It depends on...

1. is it equity or debt?

2. what does your investor want? a certain predictable return or a portion of the profit of the deal?

3. how much is the investor earning now with how his money is invested?

I've gotten private debt as low as 7% to as high as 11%.

On the other hand, I've gotten investors OK with equity and gave them as little as 15% of the deal to as high as 50% of the deal.

What should be a return for an investor?

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