What would you consider a fair return?

Question

A big plus of being a real estate agent is the ease of making alot of lowball offers.

I have noticed some banks do a good job of gradually lowering their prices until a property sells, others tend to let more of them sit x amount of time and finally take a lowball offer way below their asking price.

I have a little cash, and have bought a couple of houses this way, though I live in one and sold the other on a land contract, so do not have any amazing return stories to share with a potential investor.

Lately I have been thinking of trying to find someone to go in 50/50 on the purchase with me.

My question is..what should I offer them? Was thinking of 12% interest on what they put in plus 20% of the profits. Would add them to an llc, llc buys and immediately relists property, split cash up when property sells.

Small amounts, only looking for 5k-10k and thats all I can afford myself. Is this even a realistic idea with the small amount of money involved?

For what its worth the market is not great in Michigan, you would be suprised what 20k can get you.

Thanks, Scott

Vikram C. · Answer

The percent of profits will depend on:

1.  Your track record,
2.  The expected ROI

If you have a strong track record of consistently great ROI, you can part with less.  In your case, since you have done just a couple of deals, the investor will be looking for something closer to 50-50.  As Jon mentioned, since you are doing part interest and part profit share, you will be able to offer less than the normal 50% but how much less will depend on the anticipated ROIs of these deals.

Jon Holdman · Answer

Usual split between the "money guy" and the "do everything else" guy is 50/50 on the profits.  Your offer of a preferred return (the 12%), though, is pretty generous.  I suspect you may get takers based on that alone.

As the lender, I'd want to have a deed of trust, not just be an investor in an LLC.

You also need to be careful with getting investors in LLC.  If its your good buddy you've known 20 years its probably OK.  If its someone you've just met, probably better to do the loan.  Getting investors into an LLC is selling securities and is highly regulated.  There was a recent post that made it sound like even the lending was dicey.

Scott Williams · Answer

Thanks guys

Guess I will do some studying and take some notes.

Scott Williams · Answer

Jon, Thanks for the quick reply.
          
          If I am planning on using their money along with my own to show proof of funds first then buy the property how would I give them a deed of trust?
          
Only looking to work with one investor, could I still have issues with "selling securities"?
          
I am open to different ways of conducting the transaction and giving the investor security, an llc just seemed like an easy way to buy, sell, and control the funds.

Edit to add: I am looking at it from a different (incorrect?) point of view.

Basically you are saying simply make it a loan with set terms and time limits and give them a deed of trust on a property, perhaps a different one I own free and clear.

But I am trying to make it more complicated by tying it to a house I have yet to purchase.
          
  Thanks, Scott

Jon Holdman · Answer

You would use a letter from this investor guaranteeing they will give you the loan, along with a bank statement showing they have the cash in the bank.  Then, when you close, they will make the loan as part of the closing, both of you will put in your money (same as a regular loan with a down payment), and they get the deed of trust in first position.

Yes, even if you have just one investor you're selling securities.  The issue is less when you're starting than if things go wrong and lawsuits start flying.  You MUST consider that possibility up front and do things correctly so you have coverage if you do end up in court.

"Control" really is a big part of the issue.  Are you the manager of the LLC?  What power does the investor have?  Can the investor nix a deal?  Can you do what you want with the money with no input or control from the investor?  These are all the sort of questions that are spelled out in an operating agreement.

What would you consider a fair return?

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