Finding private money?

Question

What strategies are seem the best to finding private money to fund deals?

John D. · Answer

@Kedian Jimenez Find a deal, get it under contract, then post it in the marketplace!  Money has a way of gravitating towards deals.

Don Konipol · Answer

Statistically, most occurrences tend toward the mean.  Most deals are actually within 5% either way of being average.  While a "great " deal can be found, they are few and far between.

Most hype about great deals in real estate are just that, hype.  If one has a certain amount of money he wants invested in real estate, he will have to settle for mostly average, or mediocre deal over the long run.  There will be some great investments, perhaps a few "bad" investments, and plenty of average investments.

A common mistake amongst investors, particularly new or unknowledgeable investors, is to think a deal is "great" because it has, or seems to have a higher rate of return.  But often it has this higher return because of higher risk, less desirability, or less appreciation potential.

Another common mistake when it comes to deal evaluation, is to assign no monetary value to one's time.  For example, I have say $50,000 I wish to invest in real property.  I can buy property worth $50,000 and choose from numerous offerings readily available. My time commitment is the three hours it takes me to analyze three deals, choose one, negotiate and close.  Or I can look for a deal that I end up with 20% below market.  It takes me 100 hours of looking at properties, visiting properties, getting repair bids, negotiating with unsophisticated sellers, looking at fsbos, finding liens on properties greater than their value, etc., before I am able to secure a deal.  Because of the nature of the discount I am trying to obtain, I end up buying a property worth $50,000 fully repaired, for $30,000 needing $10,000 in repairs.  I then spend another 25 hours finding and supervising contractors, 15 hours dealing with governmental authorities to obtain permits, occupancy certificates, etc. 15 hours doing cosmetic repairs myself to save money, and 20 hours showing the property, running ads and negotiating leases for renters.

So I have purchased a "great deal", a property that I now have $10,000 equity above what I have invested.  What I haven't considered is the 175 hours I have invested for this $10,000. What seemed like a great deal was actually unpaid labor.

If you find a great deal, ( and you will come across them infrequently, but occasionally) then jump on it.  And I don't mean flip it for a couple of grand, I mean do everything you can to maximize your profit.  However, as a long term investment strategy, it is not sustainable.  What is sustainable is setting criteria that includes both risk and return, and striving to invest in those deals that return a little above average given their level of risk.  Return can be further enhanced by identifying and investing in those markets that are temporarily undervalued, though this requires a level of knowledge, experience and expertise greater than what most investor possess.

Gurus like to tell us that " great" real estate deals are ours for the taking, like ripe fruit waiting to be plucked.  It's something the new, unsophisticated, and inexperienced want to believe.  Like the other misleading guru lines " A $10 million deal is the same as a $10 thousand deal, the only difference is the number of 0s" and " a college education is a hindrance to making money" it can only lead to frustration and disappointment when reality sets in.

Don Konipol · Answer

@John D, it appears we may be using the term "a deal" differently. I am using it as a concluded real estate transaction, it can be at " market", above market, or below market.  I believe you are using it to mean a significantly below market purchase , as in "I got quite a deal".

Using it to mean " a concluded transaction", statistically 90% of all "deals" are within two standard deviations of the mean.  Based on a number of verified studies of real estate transactions, this means that approximately 80% occur within 5% of the mean, or average, an equal number above and below.

The thing about investing is that our analysis, predictions, projections, etc are often wrong, and what we thought was a great deal turns out to be something less.

I took the liberty of looking at your profile.  You have done quite well in your real estate investing endeavors.  You appear to be focused, have thoroughly researched your market niche, identified the opportunities, and successfully carried out your plan.  Excellent work.

One thing I did notice, however, is that you have been investing with your current intensity for only one and one half years.  So your investing has not been tested in various markets, changing markets, declining markets, over time.  I suspect that once you experience something like "2008", your experience concerning the availability and investor ability to consistently choose only " deals" will change.

No disrespect meant here, but the investment landscape is littered with the bankruptcies of investors who made tons of money during one type of market over one market cycle, and went broke when the market cycle changed.  Usually because they thought themselves, their strategy or their ability infallible.

I have been an active real estate investor for 37 years.  There are a few, like Sam Zell that find great deals and flourish in all market cycles.  For most of us however, adding a few extra percentage points to an average rate of return over time is a sustainable investment program.

As an old stock market adage goes " Never confuse brains with a bull market".

John D. · Answer

"Most deals are actually within 5% either way of being average."

I'd argue that statement is not true.  And I'm not sure how a deal could be the wrong way of average, assuming you are quantifying a deal along the same criteria as this average.

I would also argue a properties qualifying as a true deal or not cannot be done solely based on one criteria, such as rate-of-return.  It is all relevant criteria that one should score a property against.

I have deployed significant amounts of capital in relatively short periods of time, buying many properties that are better then 5% of average across multiple relevant criteria.  As have many here.

A property within 5% of value as a purchase price, with 5% better then average rate-of-return, with all other criteria remaining the same, is not much of a deal.  And I would not expect someone to fund this "deal".

Don Konipol · Answer

Maybe......For a great deal, sure.  For a good deal, probably.  For a mediocre deal, not so much

Bryan Drury · Answer

@Kedian Jimenez,the number one strategy to finding private money is developing relationships first.Without that your going upstream without a paddle.

Kedian Jimenez · Answer

Thank you @Jeff Rabinowitz for gracefully answering that. I will do my research then. pretty to to bigger pockets. Got some stuff in the pipeline!

John D. · Answer

@Don Konipol I believe most people here, when asking about finding private money to fund a deal, are referring to purchasing a property below market value.  Most are not asking about finding private money for any transaction, i.e. any real estate transaction that might be at market value.

My profile is a bit dated at this point, in the past 3.5 years or so I've done vacant land flips, rural rentals, a couple of more standard flips, and am now working pretty much exclusively on high-end high occupancy vacation rentals.  I'm also prepping to start doing a hybrid student/vacation model.  I feel like every couple years (or faster) the market is moving beneath me so I am constantly working on what model works today, as well as what model I expect I might have to move to tomorrow.

Having spent 20 years in internet marketing, I am used to someone moving my cheese every few years in that business, and the constant reinvention that is required as a result.

John D. · Answer

@Don Konipol Is a mediocre deal really a deal?  Who wants a mediocre deal?

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