Approaching private money investors, what are your stratagies?

Question

Ok, so to catch you up on me...I've been buying and selling homes since 2000.  I started off as a builder and moved into rehabbing.  When the markets tanked the bank money went with it.  I quit building and rehabbing, held what properties I had, and just kept waiting on the banks to start lending again.  Tired of waiting... I found an individual who was willing to use his money and split the profits.  50/50.  It got me back in the game but didn't take long for me to grow tired of giving him half of the profit and me doing all of the running.  Don't get me wrong.  I'm grateful for the opportunity.  So, I figured if he was willing to invest, there have to be others.  After listening to BP Podcasts, I noticed a trend...build a track record and the money starts to come(with marketing and legwork of course).  To my question.  I have made portfolios of before and afters of each of my last 5 flips.  I have a before of a property I have under contract along with comps, estimated costs, ARV, the whole 9 yards.  How do you approach the investor?  How do you lay out the deal to them?  How much info is too much?  Do you tell them your profit margin?  Keep in mind I know the individuals I will be speaking with.  They know me and my character.  These individuals have money in cd's drawing low interest.  I have borrowed from some of these people in the past on a friend basis with little to no interest.  I don't want to approach that way.  I want to approach it as a business deal.  Any suggestions are appreciated.

Jeff Rabinowitz · Answer

Simply put an ad in the paper seeking our local investors who have capital or credit.

I would never consider answering an ad in the paper (the paper, really? Who would even see it?) or anywhere else. I couldn't imagine working with someone who would answer such an ad. Private money is a relationship business. There must be mutual trust and goals or the transaction is doomed to be disappointing, or worse, for both parties. Lawsuits are expensive.

Jeff Rabinowitz · Answer

@Michael Hicks, welcome to BP. It seems that you are in an enviable position. If I am understanding correctly, you already have a network of friends who have loaned you money before based on your relationship and you have repaid the loans to their satisfaction. Now you would like to approach them again and offer them a greater interest rate. They are quite likely to participate. As far as how much to tell them...just ask. Some may not care to know much of the details and will trust you again. They are likely to continue to trust you if you continue to perform. Others will be very interested in what you are doing and will want to know more of the details. Share everything you are comfortable sharing. If your lenders begin to feel like partners and are happy with their returns they are likely to spread the word to their contacts. You may soon find yourself with a very large private bank that you can return to whenever you have a suitable project.

Michael Hicks · Answer

@Jeff S, I guess I should explain a little better.  I started working (at age 14) for my best friend's dad.  He was a large residential developer in the area.  I worked summers throwing hay on freshly graded lots, shoveling dirt off of the curbs, and anything else they told me to do.  I learned everything I could from him and credit him for my success in real estate.  By being around him, I met lots of influential people that I have known for 15-20 years now and consider friends.  Some of these people have money.  Some have fronted me lots to build on with no interest until the homes sold.  Some have fronted cash to purchase homes off the courthouse steps with no interest until I could get financing or move money around.  There has always been a promissory note signed but nothing filed.  After joining BP and listening to past podcasts, I am looking and approaching capital with a totally different mindset.  Thanks for your response.

Account Closed · Answer

I approach a lot of friends and and colleagues to borrow money secured by real estate. For what I do, I ask for $50,000 at 8%, 5 year term. Most of the time I'm buying houses for cash and holding the note on them. It appeals to them because I'm not maintaining the house, the end buyer is. But I've also done this on rentals as well and gotten loans too.

Jeff S. · Answer

It's interesting Michael, how we'll freely ask pointed questions of our borrowers about their personal financial positions, that we'd never ask of family or friends.  I guess it's just considered normal between borrowers and lenders but certainly an issue when you mix business with your buddies.

If you are approaching them with the same intent, as it appears you did previously, what's wrong with that now? The only way I can see around this would be to make greater use of professional resources than perhaps you did in the past (?) – which you should do anyway.  That is, a broker or lawyer or both, however it's done in GA, for all formal/legal communications.

I see nothing wrong with discussing every detail of your deals -- including anticipated profit margins and your history of success.  They do want you to make money, don't they? You could meet and describe the details as I imagine you've done previously; preferably at the premises to make it real – don't tell me you used to do this in a bar :-), and include what you need from them, and what they can expect from you.

Present your anticipated P&L for your property, as well as comps and builder estimates, and review all numbers.  Discuss what you will earn, as well as they. Or not. You should all know the various outcomes in advance, good and bad, and they should understand how their loan is secured.

If they agree, the next communication would be from your attorney or broker to arrange the legal details and associated paperwork.  I would think this could get the point across that this is a business deal and not a handshake among friends.

This is as professional as it gets, and frankly not much different than our model out here, except we won't do business with our friends or family.

Much as I'm not a fan of doing business with buddies, this is water under the bridge for you, Michael, and it could work our well.  Good luck.

[One point is to make sure these are loans and not some sort of pooled investments among your buddies.  By using the words "partnership" and "investors," you are not completely clear.  In this case, you really might need a securities lawyer and very much have to be careful what you say and write. Again, good luck.]

Michael Hicks · Answer

@Jeff Rabinowitz  Thanks for the response.  That is the goal.  I am just wanting to make sure that they see it as a partnership vs helping out a buddy.

Michael Hicks · Answer

From what i understand, you are asking for the use of $50,000 for 5 years at 8% APR rather that asking for funding on a deal, paying back the investor, and asking again.  If that is the case, that's definitely  the way to go.  Thanks for the tip.  They key is to keep the money working.

Michael Hicks · Answer

I guess the way I am looking at it is that either way they are putting up their money.  You can promise 10% but like you said, you could lose.  They both stand an equal chance of losing their money if you make a bad investment.  I could see the later strategy being more secure with a buy and hold property but the risks are still the same in my opinion.  I think I would see it that way if I were the one putting up my money.

Javier Marchena · Answer

@Michael Hicks

The risk is not the same. I promise 10% annual to one investor, no matter how much profit I make (or not). Similar to a Hard Money Lender but without the points and the paperwork.

The other gets 50% of the profit, sometimes the profit is better than others. The risk is higher because the profit can be 0 or we can loose money (this has never happened yet but it can).

Michael Hicks · Answer

Sorry for the last post lol.  Still figuring this out.  Is the risk not the same for both investors? I am currently partnering with a 50/50 investor on 3 flips and am trying to get away from that.  50% is better than nothing I assume but if they are just putting up money, why go with the 50/50 deal if you can get 8%?

Approaching private money investors, what are your stratagies?

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