Creative financing... Would you do this?

Question

:welcome: As I have mentioned here in a few places I am looking to break into a couple of different areas of real estate... one is rehabbing and the other is commercial.  I found another commercial deal that I really want to look at, but that is not why I am here.

I was thinking of ways that I can acquire the building and came up with an idea.  I wanted to know if any of you would consider doing something like this...

I need to add to my money down on a property, I may want to buy and hold or fix and flip.  In both situations I want look to other investors for down payment assistance (so to speak).  Let's say I need $5000 extra and I offer 200% return on investment.

For instance: The terms would be Investment $5000, No payments until property is rented, then something like $1,000 per month until the investor gets back $10,000. Or if the property is a rehab and flip then the investor would get hack $10, 000 at closing (after rehab).

Does this sound crazy to any of you or is this something that any of you could see working?  Please give any insight good or bad.  
Has anyone used this type of investment before?

Brian Levredge · Answer

I'd say the best you could do is a 50/50 split if someone else is putting up the dough.  It really depends on a number of factors.  If there is financing in place, the lender is going to want to see reserves and the ability to carry the loan.  If you don't have down payment money, you most likely don't have the others.  That means your equity/debt partner is carrying the paper, and the risk.

If that is the case, I would ask what your experience level at doing a rehab, etc., is in this case.  If you don't have any, then my risk is increasing and I'm going to want a bigger part of the deal to compensate for that.  I would be very careful about guaranteeing anyone a specific ROI.  That's asking for trouble.

Will Barnard · Answer

As an investor (very active and not passive), I invest in RE and alos provide funding for deals, but only as a transactional funder. 
That being said, your offer/request seems to be valid, but as a funder, I would only be interested in a deal like that if it was a flip only and I would want to see an end buyer wanting the property at your higher price to ensure my funds were safe. If there was a huge spread in the deal, I could see myself doing it without the end buyer, but I would have to be made very confident that the numbers were all accurate.

Malhar B. · Answer

Myka,

I've done something you're talking about.  I don't ever offer a "double your investment" type of return--I agree with Vikram, it is very risky.  However, I have done deals where I do 50/50 if a large portion of the funds are put up.  Many investors do want to see some sort of "skin in the game," however, I've managed to do deals with none of my own money down as well.

For something as little as say $5K, I would offer some sort of short term interest return.  However, you'd have to see if the investor is willing to put up money without any collateral.  In most cases, I go by the rule, one investor per deal, where I can usually offer some type of lien on the property to secure their investment.  Of course, on larger deals you have to be more creative about how you structure it, but I'm sure if the deal is good enough, it should speak for itself.

Brian Levredge · Answer

Myka,

Without going into too much detail, I have done deals similar to that in the past.  I'm currently putting together buy and holds with passive investors and I get a piece because I find the property and then take care of every other facet of the deal as well.

I think you want to target people who are passive investors.  You can set up and LLC with an operating agreement or figure out some other way to structure things.  The bottom line is that you can put it together based on whatever agreements you can come to.  I would put your plan on paper and make sure that it is easy enough for someone who doesn't know RE to understand

Vikram C. · Answer

Myka, I agree with Brian.  The offer of double one's money is very attractive to an investor assuming it is in a limited time-frame.  But what about the risks?  You need to address the investor's wariness by discussing:

1.  your experience in doing successful deals like this or in something else that will make the investor trust your numbers,
2.  the security for the investment - purchase price of the property should be much less than ARV, for example,
3.  how much will you be putting in?  The investor would want you to have some skin in the game.

To be honest, doubling one's money is a very attractive thing from the investor's standpoint and assuming you can address the risk issues mentioned above, many investors will be happy to partner with you.  But you still need to ask yourself whether you wish to do it from your own standpoint.  Do you have sufficient confidence in your project to take the risk of offering to double someone's money?

Myka M. · Answer

Thanks Will I can see that putting together a good deal is the best way to do this and some serious thought is going to have to go into how the investor will get his or her money back.  The offer has to be attractive in no uncertain terms.

Malhar Bhagat Thank you too.  All input is extremely appreciated.

Myka M. · Answer

Thanks Brian!  I am on the way out to look at prospects, but I will do this asap I guess putting it on paper will also give me a better idea of how it sounds.  Good Idea.  I am a sole proprietorship right now I really need to get that LLC quick. Thanks again.

Myka M. · Answer

I would present the deal from concept to completion of course. If it is a good deal then it should sell itself... Right?  I could be wrong.

Brian,
 Since I am asking for the help I would of course be flexible  (keeping both parties objectives in perspective).

So there is a possibility of something like this happening?  Have you done this before or is it something you would just consider?  The reason I am asking is because I want to try to do something like this but I don't know how to word it or even structure the deal.

Like I have someone in mind to present a deal to, I pretty much know how much everything would run, down to the toilets but don't have the down payment.  Can you give me an example of how a deal like this would go or one that you have done where you assisted with the down payment portion?

( I know this is turning into deal structuring forum post, sorry).

Myka M. · Answer

I guess not?

Creative financing... Would you do this?

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