Topics to discuss with potential PI's?

Question

Hello all,

I am in the midst of getting my REI career started and I have about a handfull of friends who are interested in investing.  I was first thinkiing of starting a company and then have them loan the company money with a fixed interest rate say 10% simple interest for a minmium of 3 months.  But some have expressed a need/want to look over and approve the house/budget before lending money and then want to split profits.

My question being if you were a PI would you be willing to loan a startup money at an interest rate, or would you want to be involved in the project and then rather see a % of the profit instead of interest.

Also I am going to be holding a meeting soon with them , which topics would you suggest we hit to get everything out in the open and how would you structure the profit split.  We will all be putting in money but some will obivously be putting in less time than say me who will be supervising on the job.

Joseph L. · Answer

Except for people in my company that are already assigned duties they would not be "doing work". Some have expressed an interest to gve input and ok the project and budget and our timeline for it. Bu besides the initial set up phase they wouldn't be doing any day to day work on the project.

I feel it might be better instead of borrowing the money from them to let them partner up and share in profits pro rata while we also take a "management fee %" off the top of the profits.  This way limiting our risk and if anything bad happens then we will all have a stake in the property rather then me owing them $$.

Brian P. · Answer

Joseph

Besides bringing money to the table what are these "partners" going to be doing. If money is their only contribution than payment of a generous rate covers their contribution plus you could throw in a bonus if net profits exceed such and such.

Back when dinosaurs roamed the earth I did a deal with 5 friends/partners on a commercial property, and within 3 months they had all bailed on me, I had to scramble to buy them out but It turned into a real good money deal.

So I threw a party at a restaurant for my "friends" and on the wall was a poster of the check I got when I finally closed escrow.

Should have handed out crying towels after watching these couples blame each other for not having a share of the big pie on the wall. A few month before they were telling each other how smart they were to dodge my bullet.

Joseph L. · Answer

I know I won't have a problem with the SEC as the # of investors and the $ amount is way below what you actually need to register due to Regulation D rule 504. And these would be money from friends so I am not soliciting or advertising for it.

I believe an easier way to probably finance my first couple of projects would be to start a Joint-Venture where everyone puts in capital at the start.  This way they are not "investing" in the company but they are an acutal stakeholder/partner. this will help limit my risk and also gain experience.

Please correct me if I am talking funny or if you can give examples how you structered your first couple deals? (financing wise)  I would like to stay away from conventional loans for the first few and just do all cash deals.

Opinons/comments are more than welcomed thanks guys for helping me understand more.

Joe

Bill Gulley · Answer

Joesph,how are you going to structure putting 5 investors in a deal? Have you checked you state securities laws and SEC requirements. Even asking for 5 investors can get you in trouble. If you have 5 investors, do 5 seperate deals, IMO.

Joseph L. · Answer

Sorry I didn't clarify MAX,

I meant we might be leanin towards a joint venture for the first couple rehabs so everyone would receive a % of the profits. I believe I would have an easier time to get them to invest this way rather than a fixed interest rate.

As an example if I had 5 people all put in the same amount $, but I would be in charge of the project what would a fair % I would want to ask for? 25% of the profits off the top and then split the rest? Or do you see this being a problem?

Since this would be our first time I believe most would be reluctant to just give me money with having an input on the house/budget.

Sharad M. · Answer

I think if you are an experienced investor and as long as the PI is getting paid on time each month, I don't see why PI would need to be involved in the decision making.

If you are paying your investors a fixed rate of return, wouldn't you keep everything that's remaining?

Joseph L. · Answer

If we were to choose a fixed % of the profit how much input would you want a PI to have in the decision making? And what's a fair extra % I would receive above our capital contributions for doing most the work.

Sharad M. · Answer

Joseph,

If I were investing, I would personally want a fixed interest rate and a portion of the profits IF you have no prior experience at all with REI. But if you have prior REI, then I would be happy just getting a fixed interest rate as a private investor.

Bill Gulley · Answer

IMO, you'll likely find a % of the project to be more successful.