Rental Property Investor · Coopersburg, PA · Member since 2015 · 29 posts · 9 votes
I just finished listening to Brandon Turner's interview with Michael Blank on investing with other peoples money. If you have not listened to this it is a great interview and very informative.
I feel confident in my ability to raise money and have some investors currently allowing me to get in to a big deal sooner than later. The first question I have for the community is what is a good rate of return to offer in the current market for investors? Is there a standard average to follow like the stock market etc...?
My second question is how do you structure your hold and sell time period. Clearly as long as the property is making money my wish is to hold it for 10 plus years but investors may want their money back sooner if they are older than me or for various other reasons. Do you put in verbiage that deals with market fluctuation in case the sell period comes up and the market is on a downswing so you want to hold it longer?
In the past I had used a 20% for the sponsor and 80% for the investor split. There was an 8% preferred return to the investors as well. It was setup as a 5 year hold but the date of sale was up to the sponsor. It could be sold anytime or held as long as it made sense.
@Steve Olafsonthanks for the response. In the interview Michael Blank was against preferred returns because of the negative implication on off years with a stacking liability if the property did not make the total return you promised. Have you ever had any issues with preferred return offers in your deals?
You need to earn the investors trust and earn them money. Why should you get paid when the investors are making sub-par returns off of your projections?
Yes, I had a deal where the investors only made their preferred returns after 5 years and I did not make anything. I have had other deals that returned the investor over 100% per year. I made plenty on those and I EARNED it.
Not offering a preferred return is like not having any confidence in your deal.
I appreciate your response @Steve Olafson but don't really feel that not offering a preferred return is like not having confidence in your deal. REI is not a risk free business and market changes can't always be predicted but that is what you are doing with a preferred return. I get how it can be a big plus for the investors but I don't see the upside for your time investment to predict a guaranteed 5 year trend in any market. I feel that a reasonable sponsor/investor split is fair without the guaranteed return percentage.
On the flip side at a certain point I can see larger investors and more seasoned lenders would have certain expectations and preferred returns may be a requirement. These guys are usually playing in much bigger business deals and already make a certain average percentage over time.
I think it is a case where there is no right or wrong answer across the board and each deal has to be viewed by its merits, returns, and how much is being lent compared to your own investment both time and money in the project. But I can see your argument and Michael's, depending on the situation, being the right choice.
Thanks for getting me to think deeper on this subject,