Equity Partners - Avoiding HML

[Jason F]

Does anyone frequently utilize equity partners in their deals? Or have a group of passive investors that fund their deals?

Over the years I realize more and more that there are likely people in your community that have the cash to invest in properties but really have little to no idea about real estate or the time to search out deals and execute them. I can’t begin to count the number of times I have been talking to someone about what I do at a party and them telling me that they ‘are looking for properties to invest in’.

I have had a number of friends of friends, or parents of friends, that have the cash to invest in RE but don't have the time/know-how. Many times conversations with these people turn to the idea of me finding properties and them financing them, both of us splitting the profits.

I just wanted to see what the general consensus was on the idea of looking around for people that want to invest in real estate. Not really, ‘establishing a fund’ but simply going into deals with people in your area that have the cash but are struggling to find good investment vehicles. I’m thinking by doing a couple ads or mailing campaigns you would quickly find people interested in having their money managed for them in RE deals. (please no SEC regulation discussions)

Think about how much money is spent by investors on hard money loans, points, fees and then 13%+. Or how many deals/time is wasted trying to find a bank to lend you money at 10%? Don’t you think there might be someone in your city that would love the chance to lend money at that rate or even less? Or have the chance to get into a deal that will CF for them monthly, require no work and eventually land them a nice residual profit?

Honestly, think about where that hard money comes from anyways. It's most likely channeled from 2.5% savings accounts bank to bank to bank until it eventually ends up being marked up to RE investors by some HML. I saw an ad on TV the other night by HSBC Direct that was advertising 3.5% APY on a savings account. I'm sure people all over the country jumped on the phone and started moving funds out of their money market account. I know it's ‘secure', but 3.5%??

I really think the same would happen if you advertised terms similar to money you would pay a HML or a CF and profit share basis. It might cost just as much in the beginning, but once people realize that you will consistently generate a profit on your deals your cost of funds will decrease accordingly. With the amount of people that have expressed interest in investing in RE with me (and I'm not the sharpest tool in the shed), I am starting to think it might be the way to go. I don't know, it just seems like there are a lot of smart investors that are limited only by capital and there are a lot of smart savers that are limited only by their lack of RE knowledge. Why would they not want to find each other?

Any thoughts?

[Cody L.]

personally I’d MUCH (oh so much)rather take on a lender than a partner. 

I don’t care about debt. I do care about the responsibilities that come with having partners, all the things that can go wrong, and giving up my upside. 

I’d much rather say “loan me money, I’ll  pay you x%”. If the project doesn’t do well, they still get paid. If it does great, they get paid. I’d pitch the fact they’ll get paid and have secured principle vs introducing risk to them (not that there isn’t risk in being a lender, but that can be mitagated)