Real Estate Agent · Worcester, MA · Member since 2015 · 7 posts · 0 votes
Hello, Im looking to ask some friends and family to become silent partners but as a "lender" only in my RE investing. I am currently an active RE agent and looking to get into investing. What approach do I use and how do I sell them on putting up some funds and I do all the leg work? What about compensation?
Remind them what's been happening to the holdings invested in Wall Street and ask them would they like a better, safer return secured by real property.
Negotiate the best terms you can, of course. The folks in my group are willing to pay 12% to 20% for private funds depending on points and payments.
Hope this helps...
David J Dachtera
"Success is not a destination. Failure is not an event. Success is a process, failure is a choice." - DJ Benedict
You might have already have done this, but I would start with casual conversation and see where it leads. People find real estate interesting in general and your enthusiasm can be contagious. Listening to their needs and interests can help you find what's mutually beneficial.
As for compensation, one structure could be a silent partnership where you each get some percentage of the profits. This takes some pressure off you around the risk, but especially if you're dealing with friends and family, the downside is whatever conflicts could arise if you run into problems (at which point I'd imagine a silent partner might have a lot more to say).
A loan is another possibility, which puts more of the risk on your shoulders. Assuming you personally guarantee, you'd have to go into your pocket to repay on schedule if something goes off plan with the investment. However costs to repay a loan should be less than what you would offer in a split with a partner who shares your risk level. As for how much, if the potential lender has other investments (CD's, stocks, etc), I would try adding 2+ points of interest to what they're getting on best of those, and maybe a bonus or stake in the profits if/when you sell the property.
Thanks for your responses! Nancy you mentioned each partner gets a percentage of the profits...Scenario 1: My investment would be knowledge and all leg work to complete the deal. Partner would just fund the deal. What would an ideal profit split look like? What are some creative ways I can repay them?
Scenario 2: Partner matches my initial investment on a buy and hold, What should I offer them?
Also should I just treat them as a lender, not a partner? They invest and I can either pay them back in monthly installments with interest or a lump sum with interest?
There are as many ways to structure it as you can imagine.
They are a lender. They loan, you repay. They are not part of your company, they are a bank that you work with. You negotiate interest, amortization, balloons, etc. If I were in their shoes I would never let you pay me in a lump sum on your first deal. You have to learn that money goes out during your deal and waiting until it's all over is more risk for them and less (visible) responsibility for you
They are a money partner. They fund some or all of the financial aspects and you do all the work. They are part of your business. You split everything 50/50 or whatever is comfortable