What's a fair rate of return to offer to another investor?

Question

I'm investor in the Cincinnati area and till now I utilize mostly my own cash.  I was working a full time job and my wife and I were both RE agents (I just banked my license).  I'm looking to run more than one or two at a time and would like to offer my investor friends a fair rate of return first before going to banks or hard money.  The wife and I run with 60k to 130k cash on hand and I wish to leverage this to obtain multiple properties.  My two thoughts are use cash to obtain property then either go to local bank and give a first position and take out 50% or whatever's needed that way I can move onto purchasing another.  Any suggestions of a great bank for this would be nice.  Higher interest is not an issue but I wont pay points or high closing cost.

I have investors and people coming up to me all the time that would be willing to put up the money but they traditionally want ownership or they are regular Joe's just getting killed in the stock market.  So with interest rates low I know it's not wise to offer too much but I would like to give friends the chance to earn some money.  So what would be a fair amount to offer people?  Would you give a first position to someone in order to secure the deal and give them peace of mind?

Michael Noto · Answer

If people are coming to you looking for an alternative to investing in the stock market why not just offer them a 7-10% fixed return on their money instead of an equity stake?

Bill Gulley · Answer

What is fair is what can be agreed to. If people are coming to you, you aren't soliciting them, they are soliciting you, so why should you make the offer? Ask them what they would be willing to take to get involved, negotiate after that. You might say 12%, they might say 6%!

They might say; I'm getting 5%, you might offer 7%.

He who speaks first loses.

Now, while your private lender may consider what the are getting to compare to your rate, do not base your rate by comparison to their other investment, you are not that other investment, risks with you will be higher if they are in institutional financial dealings. Rates are a function of risk, so don't imply your investment quality is the same. I generally cover this aspect by saying "Well, I'm not bank holding your CDs, that's why I am willing to pay you more".

If I offered equity, I would only pay their cost of money and split 50/50. Their cost of money being what they are all ready getting, if that rate goes up, the equity goes down. That's my way. You can't negotiate that if they really believe you need them, it's an opportunity for them, not so much for me as that's what I can get anyway. If you beg for money it will cost you!  Good luck :)

Sean Cole · Answer

As I go out and raise money in Cincinnati to provide private lending/hard money loans, investors are nearly unanimous in wanting 12% on the very low end and 15% on the high end.  There's a few local banks that do rehab loans at 85% of project cost, but sometimes they crawl so far up your rear end that you can taste them...I get your pain on paying points & high closing costs, but I think the most important thing to consider is your cash on cash return for the project and the difficulty in securing the financing.  For our business, we lend on houses that we sell, so there's a never execution risk for our rehabbers/borrowers.

Brandon Moryl · Answer

@Steven Bibbs, I had an investor/hard money lender fly in from Cali last week and he was telling me they have strict laws on how high they can charge. I believe he said something like 2 points and 10% max. So even if you are willing it might not be legal. From the way he talked they had plenty of hard money out there and if they are truly deals you shouldn't have a hard time getting money. Try not to pay over the going rate as it's better for both of you to make little money 100 times than one of you make a lot once. Good luck and I wish you success.

Steven Bibbs · Answer

I am willing to pay 5 pts. just to have a 100% funding on my deals. I find these all the time but, funding is my issue. Any, ideas o pointers?

Darrell Shepherd · Answer

I pay my guy 2 pts and 12%.  Kinda high in today's market, but I want to keep him happy.  I'm WAY more interested in having unlimited access to cash than squeezing every penny out of every deal.

Also, my deal is 100% funding, all monies up front, no payments, he gets paid when it sells.  I make up whatever few % I supposedly over pay him by being able to do way more deals with that structure.

That's for flips.  I personally wouldn't use private money for long term holds, but I'm not a buy and hold guy.  Not much advantage to private money for long term unless you are over leveraging them.

Brandon Moryl · Answer

Thanks everyone for the info and input.  Lee - Very interesting on the percentage due to what you bring to the table.  I'll look into that for future partnerships.

I'm not soliciting these investors and most of them just see what I do and want in.  They are unhappy with returns and unstable stock market and they rather go into a tangible asset.  The reason I say fair is I always want a win win deal and honestly there is enough to go around.  With that being said I'm reasonable to know I can get a bank loan or I also know what hard money runs if I even need that.

So an example of what I was thinking of offering was the 7-10 percent and here was some thought behind it.  If I can avoid paying points on closing then I rather pay 7-10 than 5% plus 1 point close 3 times a year.  So I would be at the 8 percent range anyways plus have to deal with bank.

I always try to think of both sides so I know as investor that I would be happy with 10% return on cash laying around but I would be willing to take 8% if it's a secure loan.  I don't know if I'm going to do this but it's something I'm tossing around.

Instead of giving first position I could get it drawn up as loan to my LLC so they would have something if I get hit by the bus.  Everyone would have to be protected as it's sad but too many bad people out there.

Until I run out of cash it's not worth my time right now but as I grow or more opportunities come up it may be an option.  Again thanks everyone for your input I really appreciate it!

Christina Carey · Answer

@Brandon Moryl Most private lenders we deal with expect 10-12%.

In my opinion, unless you're giving a % of ownership on title - and I wouldn't if they are only a passive investor - I would go as far as saying that it would be unethical to not give your lender a first position mortgage (and record it). Look at it like this, if you got hit by a bus tomorrow, who would know that your lender has a vested interest if nothing were recorded?

Alex Franks · Answer

MIchael agree with you on the numbers. We are building a fund here for New construction in Charlotte NC. Our fund is still small going to be close to$5m to start and upwards of $8m but we are offering similar returns 7-12% . Every one is different but at the, same time if you investing and looking for a return make sure you have your exit strategies covered should you need your funds back.

Alex

What's a fair rate of return to offer to another investor?

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