All Forum Posts by: Devin James

Quote from @Greg Scott:

Quote from @Devin James:

Quote from @Greg Scott:

It is worth noting that no matter how profits are split, all of these scenarios would likely require the assistance of an SEC attorney to create a PPM.

The example you used was a pre-determined profit.  In reality, at the start of an investment you don't know exactly how the investment will perform. When thinking about how to structure a deal, it is more useful to wargame different scenarios. What if the deal loses money? What if it only makes $10K profit?  What if it makes $200K profit?

Personally, I will never invest in anything with a Preferred Return or Waterfall structure. (I would not offer one as an investment either.) Through wargaming, it is easy to see how the motivations of the operator can become very misaligned from that of the investor when they use a Preferred Return or Waterfall structure.  You don't get that with a fixed percent profit sharing.

I definitely left out a ton of information with the goal of not making this a lengthy post.

But I do question your dislike towards Preferred Returns?

Aside from the misalignment of incentives, this little chart I created shows why I won't invest in deals with preferred returns.

The only thing we know going into the deal is that the returns are projections and projections are always wrong.  They may be high and they may be low.  Most returns will end up in some sort of bell curve like I've displayed below.

Yes, on a middling to poor deal, the passive investor wins out.  With a waterfall return, when a syndicator hits their projection, they are usually getting the majority of the profit.  If they happen to crush it, they get massive returns.  Because I only invest in deals where the syndicator gets a fixed %, I've had passive deals return over 400%.  In a waterfall, that same deal would have given me more like 100% or 150%. 

In the end, my portfolio gives me better returns because I accept the risk of having some deals give me marginal returns to be able to get the massive returns from the home runs.

Gotcha, and makes sense.

Many of our investors are a different demographic and like the thought of a passive, preferred return.

Good question, Yes.

We will need $330K to close on the land, but if we simultaneously close on the construction loan, which we plan to do, then the true equity requirement will be $175Kish.

I definitely left out a ton of information with the goal of not making this a lengthy post.

But I do question your dislike towards Preferred Returns?

 This equity would be used as a downpayment for a construction loan. This is a real project i'm currently pitching, I just used slightly smaller #'s.

I was pitching an investor yesterday and explained to him that we can cater the investment structure to what is most important to them.

In the deal that I pitched, its a $330K equity requirement and $158K net profit on the entire project, which will be split depending on his preference.

I definitely left out a ton of information with the goal of not making this a lengthy post. 

But I do question your dislike towards Preferred Returns? 

Let’s say you need to raise $100K for a deal that will net $50K in profit

1) Equity Split – Split profits with your investor.

- 50/50 split on $50K profit

-  $25K to investor, $25K to you

2) Preferred Return – Investor gets a set return FIRST.

- 15% preferred return ($15K to investor)

- You keep the remaining $35K

3) Preferred Return + Equity Split – A mix of both.

- 8% preferred return ($8K to investor)

- Remaining profit split 65/35 ($22.7K to investor, $27.3K to you)

Each structure has its pros and cons—what's your go-to strategy?

" Every dollar you spent during the planning phase will save you $10 or more during the construction phase" 100%!!

We're actively looking at new building plans for future builds

Here some things we're considering while balancing design, cost, and functionality.

1) Cost to build – Simple rooflines, efficient use of space, and minimal wasted square footage.

2) Functionality – Does the layout actually make sense for how people live?

3) Room locations – Privacy for bedrooms, open flow for living spaces, and logical transitions.

A plan might look great on paper, but if it’s expensive to build or has awkward room placements, it’s not worth it.

What’s the biggest priority for you when picking a plan?

There’s been a lot of talk about declining birth rates in the U.S., how will this impact housing demand in the long run?

I brought it up to a friend this morning, saying I was concerned about what a smaller population could mean for the market.

He made a great point: immigration will offset that decline.

Fewer people being born, but potentially more people moving in.

Has anyone else thought about this when looking ahead at the housing market?