Equity Partners - Avoiding HML

Creative Real Estate Financing
18yFollow

Equity Partners - Avoiding HML

Jason F
Real Estate Investor · Gainesville, FL · Member since 2008 · 296 posts · 7 votes

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?

0Reply
38 views

Most Popular Reply

Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
8y

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)

1Reply
See this reply in the discussion

11 Replies

Jump to latestLatest
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    18y

    What you're talking about is private money. There are a couple of guru courses on that, Alan Cowgill, in particular. No idea if the courses are good, but what he says in is pitch makes sense.

    You say "please no SEC regulation discussions" but that actually is the heart of the matter. Advertising to a public audience will run afoul of these regulations. There are ways around this, apparently. But I can guarantee that if you put an ad on TV offering 10% or whatever you'll get phone calls from some folks you really don't want to talk to.

    I do know a guy, and have invested with him, that puts together deals for mini-storages. He's built a group of investors, mostly by word of mouth. When he has a new one, he creates an LLC, the investors buy "units" in the LLC, becoming the members. The LLC then uses that for a down payment to purchase the property. He and his partner run the property. They hire an on-site manager, but are pretty hands on themselves

    I believe Cowgill usually structures it as loans. Essentially the same as a HML. The investor loans you the money and gets a mortgage or deed of trust on the property. You pay them back either periodically or when you sell. He gets investors with "luncheons" where he gives a presentation.

    0Reply
  • Jason F
    OP
    Real Estate Investor · Gainesville, FL · Member since 2008 · 296 posts · 7 votes
    18y
    Originally posted by "Wheatie":
    You say "please no SEC regulation discussions" but that actually is the heart of the matter. Advertising to a public audience will run afoul of these regulations. There are ways around this, apparently. But I can guarantee that if you put an ad on TV offering 10% or whatever you'll get phone calls from some folks you really don't want to talk to.

    Yeah, I said no SEC regulation discussion because I've realized that most people have no idea about what the regulations mean, how/if/what they pertain to or even what the SEC does. Most people throw the acronym into the conversation and expect the dark cloud to surpass everything. It’s really pretty clear from their statues and history what is okay and not okay.

    I have read quite a bit of the state and federal statues and it is pretty clear what the regulations are trying to prevent and trying to accomplish. You are correct, promising ‘10%’ return in a TV commercial is not okay. Selling ‘shares of a fund’ without being a licensed securities broker is not okay. Telling people you will invest their money for them and then pooling the money with other people is not okay. Advertising that the investment ‘risk free’ will also probably get you investigated if it turns out not to be true.

    However, looking for equity partners on RE deals is perfectly okay. The key with these partnerships is to keep them exclusive, independent, and outlined fully from the beginning with both parties holding ownership. There's no need for me to collect money from Wheatie, Josh, Jim, Bill and then tell them I'm going to go buy properties. I would much rather present a deal to Wheatie, and if he is interested we sit down, establish and LLC and purchase it together. Everything is outlined from the beginning including CF splits, residual splits, expense responsibilities, mgt. duties, etc etc. If Wheatie's not interested then present the same to Josh.

    That is more of what I’m thinking, finding people in my community that have money to invest and are interested in working together to pursue properties; rather than getting money from people and investing it.

    While I've never read Cowgill, I understand that he advocates ‘private money'. Private money would take more of a debt approach rather than a partnership approach. While technically it is a little different that what I've explained above, I don't see why that wouldn't work also. There are plenty of people who would much rather make the loan than be a part of the partnership. It would probably be easier to leave the decision up to them. The similarity is that you are working with people on a more personal level and your funding source is localized rather than searching all over your state looking for a HML. I'm sure the rates might also be a little bit better.

    Thanks for the input Wheatie, your responses are always very much appreciated.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    18y

    Personally I think the debt approach is the simplest. And, from the view of the RE person, probably the cheapest. If you compute your return on a decent deal, and then carve off 50% for a money partner, they're usually walking away with more than a HML would, let alone a private investor that you're paying 10-12%. Lots of folks would like a 10-12% investment. Having a recorded mortgage/deed-of-trust also gives a degree of assurance that its real. Partnerships just seem messier to me. With a big deal like the mini-storage ($2.9 million, 288 units plus RV storage), you need that complexity in order to get enough money to do the deal. With SFRs, and even small apartments, debt seems simpler.

    0Reply
  • Jason F
    OP
    Real Estate Investor · Gainesville, FL · Member since 2008 · 296 posts · 7 votes
    18y

    Thats a good point. Private money would be much more straight forward and offer a little more security to the lender/partner. Regardless of the outcome of the investment, they are paid what they lent.

    I guess on the flip-side, that would make the investment a little more riskier from your position. But, hey, that's leverage.

    0Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    8y

    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)

    1Reply
  • Brian Babbage
    Rental Property Investor · KY · Member since 2018 · 24 posts · 18 votes
    8y

    I have only done one deal thus far, so take this for what it is worth. By taking on partners I sacrificed far too much equity in the deal, and hamstrung myself on future deals as I now have to worry about either taking them along, or pissing them off. 

    Think long and hard about it, and go for the private money/ creative financing options if possible. 

    Hope this helps

    -Brian 

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free