How to take on Investors

Question

Hello I am an active reader but this is my first post.

So I currently own 4 rentals, looking to continue purchasing them. I have also had success with 2 flips recently. I am looking to continue to do flips and purchase more rentals for long term buy and hold. I am still fairly new to the business but so far things are going well. I have been approached by a couple friends and family members who would like to invest in the business.

I currently have two people who would like to invest 100k each in a passive setting in exchange for a dividend or something along those lines. I obviously don't have enough shareholders to for a Reit but something similar on a much smaller scale is what I would like to do.

What is the best way to structure and go about this?

Arlan Potter · Answer

I do a passive investor program for friends, business associates, etc..  If I find a deal on an investment buy and hold, I allow an investor to provide funds for the purchase. They will usually provide 80-90% of the purchase price, providing a fair amount of equity in the deal. In exchange for their money, they get first mortgage on the property to secure their funds, with monthly interest payments. They make an 8% return, like the monthly checks, and the security of and investment secured by real estate. it allows me to purchase properties without graveling to banks, getting appraisals, paying loan fees, and making cash flow without much of my own money.  It is strictly a loan. Works for me.

Joe Villeneuve · Answer

First, instead of being partners, I would see if they would instead be willing to be a lender.  The loan would not be for any specific property (this is critical).  The $100 loan (from each investor) would be a business loan directly to you, under the following terms:

1 - 10% simple interest. Interest applied to the original Loan amount, and not to the remaining balance.2 - 20 year term to payoff.3 - Payments would be made monthly for P & I.4 - Interest over 20 years @ 10%/year = $10k/year for each loan.5 - Principle payoff per year = $5k/yr/loan6 - TOTAL coverage needed = $15k/yr/loan or $30k/yr based on $200k in loans (both loans)

This allows you to use the funds as many times as you want, but only have to pay for these funds once.  Each time you use the funds, you reduce the cost per use as they are applied to each property.  The more you use these funds, the less expensive these funds are, until they eventually become almost free.

All you need to do, is make sure that you have a minimum of $30k/yr in profit, to make the payments on the loans.  This can come from direct profits, from cash flow, or by the use of a cash reserve.