What does Private Money want?

[David M.]

Hi Everyone.  I've been actively investing in single family residential properties for about five years.  I've bought long term rentals and short term rentals.  I've bought a freshly renovated property and I've bought an original property to renovate and refinance.  I have learned a lot and thankfully have a nice little portfolio today.

As I dive further into the real estate business, it is really what I want to do, but I see how much money it truly takes to grow.  I'm even contemplating starting a property management company to keep me close to real estate all the time, instead of for my "side hustle".  At this point, I'm considering pursuing private equity for the next portion of my portfolio.

My question is this, what does private equity expect in return?  As I understand the model, the general incentive to private money lenders is to put money in a relatively safe investment with a multiple better return than say, T-Bills.  I realize this can vary widely, as private money can be anyone from my Uncle to an unaffiliated wealthy investor.  However, is there a typical expectation of the total return of capital, or a long term position in the property?  It is hard to model properties without this basic understanding, of course.

I am a buy and hold investor, so the position I take is with the intent of keeping the property.  I don't understand the process to refinance out the private money if it is expected to be returned in five years for example.  The property's monthly net cash flow would have to generate the investor's return, which doesn't seem problematic.  But then what, are we partners in the property long term, or do I pay down the private debt long term with my net cash flow from the deal, etc.?  Also, what are some expected down payments for an arrangement like this?  Finally, if there is something obvious I am missing, please feel free to let me know (nicely, please).

Thank you for your input, it is much appreciated!!

[Todd Dexheimer]

If you are a buy and hold investor, consider using private money by giving them an equity position. In my syndications I give away 70% of the equity in order to raise the funds needed for the down payment, reserves, closing fees, etc. This allows me to provide my investors with a strong return, yet you are not obligated to a debt payment to your private money. 

As for return expectations, it really depends on your money. I think a 6-10% cash on cash and 14+IRR is attractive to most investors on multifamily or commercial. For flips/short term you will be looking at 10-15% annualized return.