How to distribute profits between investors

Question

Hi All!I have been struggling with figuring out how to distribute money money between investors when raising money for a real estate deal, and maybe you guys can help me out to understand this.I see investors looking for investors, and they offer 12% returns annually with a minimum to invest. I wonder how is this possible? How can you give somebody 12% if they invest the minimum, and also give 12% to somebody that, let's say, invest double the minimum? It just does not make any sense to me.Does anybody understand how this process work?For instance, let's say I am looking for investors to put $100,000. And I know that my property has $10,000 of return annually. If I tell my investors that I will give them 12% annually, I would be lying on this case, Ince 12% is more than what we make, correct? So, how do I calculate how much to give the investors?Hopefully I explained myself clear :)Thanks a lot!Victor.

Ron Flatt · Answer

Ok, i do not know all the ins and outs of your deal.  But you said it has 800+ cash flow.

Go to the BP tools and pull up your property with all the information.

Set up an LLC and try to convince a few investors to front 30% of the property, for the downpayment.

Then get a loan for the remaining 70% + closing from Bank.

Example:   $200 K prop,  borrow from private individuals $60K at 12% for a min. of 5 years, with a balloon at end, if they want to be paid off.  Borrow $140K from Bank on as long a term as they will give you.

So you will have 60000 that you will be paying $5000 a year in principal

You will have 140000 bank note at probably around 6 or 7% for 15 -30 years.

You will have to pay taxes, insurance, maintence and capex, property management(even if you do it yourself).

At the about year 3 of ownership, you would ask your private money people if they are going to want to get cashed out or renew, for another 5 years.

Somewhere starting at beginning of year 4 you will start the refinancing, and payoff anyone who wants to be paid off.  Use the extra after paying off investors who want to be paid off, to purchase your next deal.

The hardest part is finding the first investors,  they are having to buy you and the deal, because that is all that is there.  If you pay them as you promise, you will find some of the people who pull out, may be out for 2-3 months and then come back say well you know last time I only put in $5k but I think I could invest 15 or 20 maybe 100K if you have something.  Once you have them coming back, then you can work on getting the private money rate down, because they know you will deliver not only their interest but their principal.

Good luck

Ron Flatt · Answer

There is as many ways to decide the  break down as there are people.  The 12% return is on their share.  A person who invest 10,000 will get $1200, the person that inves 100,000 gets 12,000.

The main problem I see here is that I want more than $10,000 on a $100K investment.  It appears you need to find a better deal.  Yes they are harder to find, but the reward is much better.  Appreciation is great, but you need to make sure you are buying for cash flow, not only for your investors but for your safety also.

Remember fall in love with the deal, not the property.  If it is not a deal, then it is not the property for you.

Ron Flatt · Answer

was late last night,  60000 @ 12% would be 7200 a year in interest.  Some investors will want some of investment back as they get their interest.  so you may have more than 7200 in payments to them.

Victor Gomez · Answer

Hey Ron,I wanted to give you a big thank you for taking the time to explain me, with an example, how would the process work. It is very valuable to me.  Thank you :)There is just one statement I did not quite understand. This one:"So you will have 60000 that you will be paying $5000 a year in principal"What do you mean with this? Following your example, 12% of $60,000 is $7,200. Did you mean that I will be paying 12% a year back to the investors? Isn't that $7,500 instead of $5,000? And also, as far as I know, you pay back the "principal" (the amount the investors paid) when they want to be cashed out, not before. Before that, you are just paying "interest" back to them annually. Am I wrong? As you can see that statement confused me, but everything else I understood it.Thanks a lot!

Victor Gomez · Answer

Thank you, Ron! Much appreciated :)I am interested in cash flow, like you said, so I am guessing that the only way to pay them back the principal of their investments is by re-financing. Am I correct? I don't want to sell (unless the property does not cash flow for any reason).In my case, I want to get a small multi-family property, a four-flex, and it is a good deal that returns 800+ a month and 12%+ of ROI. The problem is that I do not have money for the down payment, so I need to raise OPM for this deal. And I am struggling on how to make it work for this deal.Any ideas or suggestions would be really appreciated :) It is my first deal, so I am still learning.Thanks a lot!

How to distribute profits between investors

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