Simple ways to raise money for Real Estate Investing

[Devin James]

Let’s say you need to raise $100K for a deal that will net $50K in profit

1) Equity Split – Split profits with your investor.

- 50/50 split on $50K profit

-  $25K to investor, $25K to you

2) Preferred Return – Investor gets a set return FIRST.

- 15% preferred return ($15K to investor)

- You keep the remaining $35K

3) Preferred Return + Equity Split – A mix of both.

- 8% preferred return ($8K to investor)

- Remaining profit split 65/35 ($22.7K to investor, $27.3K to you)

Each structure has its pros and cons—what's your go-to strategy?

[Greg Scott]

It is worth noting that no matter how profits are split, all of these scenarios would likely require the assistance of an SEC attorney to create a PPM.

The example you used was a pre-determined profit.  In reality, at the start of an investment you don't know exactly how the investment will perform. When thinking about how to structure a deal, it is more useful to wargame different scenarios. What if the deal loses money? What if it only makes $10K profit?  What if it makes $200K profit?

Personally, I will never invest in anything with a Preferred Return or Waterfall structure. (I would not offer one as an investment either.) Through wargaming, it is easy to see how the motivations of the operator can become very misaligned from that of the investor when they use a Preferred Return or Waterfall structure.  You don't get that with a fixed percent profit sharing.