How Much of a Deal Should You Give Up?

Major burning question for real estate investors: how much of the deal should I give up when I bring private investors in? First, why is this so important? What's the big deal?

Well, I see way too many real estate investors who either want to give up too much of their deal and kill their own profits. Listen, if you find a deal, put it together manage it and see it through to a profitable result - YOU DESERVE TO GET PAID! You don't have to give it all to the money person (even if it's your first deal). Remember that you're in business for one reason and one reason only: to make money. No "if's" "ands" or "butt’s". 

Now the other side of the coin is not giving up enough of the deal. Being too greedy. This can happen a lot too, and often does with inexperienced investors. You can't keep everything for yourself, because you're not shouldering all the risk. There has to be a balance somewhere... This question is easily answered when it comes to private money loans: the piece of the deal you give up is just the interest paid to the lender based on the agreed upon rate. 

For instance: Private Money Loan: $150,000

Interest Rate: 10%

Term: 12 months

Amount Paid to Private Lender: $15,000

That one is pretty easy. However, if you've read any of my other stuff, you know that I'm not very big on private "lenders" - I'd much rather you had equity investors in your business. But that's where part of the rub is - how much of the deal do you give up to your equity investors? Let's take a look-see:

Private Money Invested: $150,000

Projected Deal Profits (Best Case): $40,000

Projected Deal Profits (Worst Case): $20,000

Time Frame: 6 months

Let's say we elect to start at a 50/50 split. This gives the investor a max $20k profit or a min 10k profit on $150k in 6 months. This brings them a pre-tax annualized return of 26.6% and 13.3%, respectively. Not too bad. This looks reasonable. The investor brings the money and you bring the deal and manage the project.

But what if the investor wants more?

Back to the math: what's the minimum amount you'd be willing to do the deal for? Say it's $10,000. In this instance, you'd look at your best and worst case profit scenarios, bake in your needed profit and work back to the investor's number from there.  Going back to our example, you might want to give the investor maximum of 60% of the deal, figuring that you'll end up somewhere between your best case and worst case profit scenario. Still protecting your profits while making the investor happy - that's the name of the game. I'm a huge advocate for real estate investors setting minimum profit numbers for themselves on deals. You just should not do deals unless you're going to make money. I hear a lot of whining on this subject that usually goes like this: "but I need to prove myself to the investor first" or "I need to get a deal under my belt first." Ok, great. Just find a deal where the investors and YOU can both make a nice profit. Never - and I mean never - work for free.

 

Bad precedent to set and bad business in general. Always lock in your profits.