Raise capital using a Survey instead of sales pitch to family & friends?

Question

I'm trying to find a way to purchase a couple of 4-plexes.  A down payment would be in the neighborhood of $150k.  Estimated Cash on Cash return would be 10%.  That's worthy of serious consideration partly because rents will increase in the near future.

I could ask the seller to take a 2nd mortgage for $100k but the cash flow would be too small with 10% at 10 years.

The issue is coming up with the down payment.  I could muster $50k but it would be "nice" to find a friendly interest rate from family and friends.  I'd love to have a rate in the range of 3-5%.  My wife says we can't ask her family for loans.  I've hinted to my family in the past and they're generally too conservative to consider such a thing.  Asking for loans (even for an investment opportunity!) isn't particularly comfortable for me (is it to anyone?).  I don't relish the though of being turned-down 98% of the time.

So, my idea is to use a quick survey (surveymonkey.com) to a big list (300?) of family, friends, acquaintances.  I'd need to explain the investment.  Ask if they need a equity stake or unsecured loan.  Ask what interest rate would be adequate.  Ask loan amount they could tolerate.  Ask loan term.  Ask for contact info to follow-up later.

(I'm not trying to do anything illegal.  My understanding is that I can market to unaccredited friends and family.)

What do you think?  Will it be effective or a waste of time? Damage relationships?

Sean T. · Answer

The survey idea is very interesting.  One word of caution is that if recipients are un-accredited you could find yourself in some hot water if a deal was to happen, although unlikely.

Check out blue sky laws.

Elizabeth Colegrove · Answer

Honestly your interest rate is too low for family friends. I would say you would probably need to offer 5-8%. Could you take a second from the seller and than pay it off ASAP with the cash flow? I am a big proponent of not mixing family and business

Raj Gandhi · Answer

@Jon Holdman thanks.  That's fair enough.

Jon Holdman · Answer

Sorry @Raj Gandhi I'm not trying to be arrogant.  A rate of 3% is better than bank CD's.  But a loan to your for real estate is FAR, FAR riskier than a bank CD.  An insured bank CD will only result in a loss if the entire US economic system collapses.  Someone who truly understands how to evaluate risk would NEVER make you a loan at 3%.  Banks make real estate loans currently at rates around 4-6%.  Hard money lenders at 15% in your area.  Personally I would not approach my relatives for a loan to make investments at all.  But if I did I would not offer 3%.  I would offer at least 8%, even if they would take less.  That reflects the risk I believe they're taking, even if they don't  fully understand that.  A lower rate would leave me feeling like I was taking advantage of their naivety.

Raj Gandhi · Answer

Yes, I posted the question to gain feedback but Jon, your reply comes off arrogant.  You're saying that the standard way to get investors is to offer 10% and ask face to face and "...be grateful".  Fine, but this is the Creative Financing forum.

The two loans I've had from family were at 3%.  They were being kind and I was appreciative.  Their capital would have been in a checking account or CD earning no more than 1%.  (They can't get more than that from a bank.)  Are these special cases?  Sure.  I wasn't looking for a "sucker" or taking advantage of anyone.  In fact, they approached me about the loan, not the other way around.

My pool of friends and family probably consists of a spectrum of investors with different tolerances for rate, capital, term.  I don't know if it is worth approaching any of them.  The point of the survey is to collect the data and narrow the field to people interested in have a conversation.

(Yes, I'll talk to a lawyer... not a solicitation... unaccredited... blah blah blah.)

Jon Holdman · Answer

Speak with a securities lawyer.  That "survey" sounds a lot like a public offering to me.

Private investors are people you know personally who are willing to invest in you.  If you're wanting they're money, speak to them face to face.  Don't hide behind some survey.

3% is a completely unrealistic number.  With that number you're, frankly, looking for a sucker.   You can't get that from a bank for an investment property.  Offer 8-10% and be grateful if you can get some investors.

Elizabeth Colegrove · Answer

We take high debt load on all of our investments. It allows us to handle it ourself. Yes we have less cash flow but we are in it for the long term.. I have worked with family and friends in a free volunteer com pacify. That has shown me that it is best for "my" piece of mind and stress level to keep the two seperate.

Raj Gandhi · Answer

@Elizabeth  Colegrove thanks for the comment.  For purposes of the survey, I agree it would make sense to have selections: 3-8% or wider.

Cashflow is conservatively estimated at $15k/yr.  If the 2nd were $100k, that's more than 6 years to pay off.  It isn't a terrible idea.

I used to say "Don't do business with friends."  Then it became "Don't do business with friends... you want to keep!"  Since starting in real estate, I've had three loans or gifts from family.  They turned out fine as far as I'm concerned.

Raise capital using a Survey instead of sales pitch to family & friends?

Most Popular Reply