Investor pay-back structure

11 Replies

Hi everybody :) ..... I currently own a 15 unit building and am currently seeking more properties. Since I didn't use any outside investors on my first one, I'm looking for some feedback on the next purchases. I have some partner-investors lined up who are willing to put some money in the pot to make the next purchase(s) happen, but without utilizing this before, I'd like some pointers. How are you who have used investor money, structuring your paybacks to the investors? I.E. if the property to purchase is $1m, down payment is $200k, and I have 3 investors putting in $50k each totaling $150k, and I use $50k of my own money, what are some optimal ways to setup the payback of the $150k outside money back to each investor, in the best/quickest way so we can roll into more properties at the fastest rate or deploy the money elsewhere, quicker? (Assume all outside money is just that, money, and these outside investors won't have any active roles in operating/managing any of the properties.) Any and all feedback is much appreciated. Thanks ;)

Hi Paul, Are you planning on increasing the value of this property, or is this pretty much a market rate deal? This is out of my personal area of expertise, but if you plan on increasing value, perhaps a nice interest-only loan offer would give you cash flow, and then you could pay them out when you raise the value and refinance. Was that what you were thinking?

@Amanda G. Thanks for replying!  I'd be looking for increasing value for sure in some deals, as I'm also looking at flips and lease/options as well.  For multi-family, if there was an option for increase of value I'd of course see that as a bonus for completing the deal too.  For an interest only loan, are you seeing that monthly payments (10% seems common) back to investor for x amount of time until refi, then payback original payment at that time, is common?  

Paul, again, I haven't done this deal myself, but yes 10% seems common. Usually that looks like a hard money rate. If you can go lower because they are going to have longer term interest, maybe try for that. It all depends on what your investors are looking for.

Sounds like you haven't settled on what kind of purchase you want to make. As I understand it, flips and lease/options are strategies mostly for smaller properties than the one you describe. For bigger deals, you are looking to make improvements to the structure and management to increase the cap rate. Slightly different games. Your customer is different, are you aiming at future homeowners or other investors?

@Amanda G. All of the above.... I guess my question should have been what the structure would be per the type of deal... I'm looking do do flips, lease options, and multi-family, as well as self storage... I have enough potential investors to where I can/want to get involved in multiple strategies.

My first choice is to always go with a fixed rate of return...so say  10% on their money.  If that cant be worked out, I like to dole out equity proportional to the amount contributed.  So if they put in 5% of the capital required to do the deal, they get 5% equity....and perhaps a fixed preferred return on top of that...say 4% interest only...so they are making 4% on the money from the start, get 5% of the cash flow and 5% of the back end equity.  I've used these strategies in the storage world with good success.  These days, I find that a proportional amount of equity is enough to get the investors a great return and actually flirts with the "too good to be true" objection.  Our last round projected a 18-22% return annually over 4 years.  The property will hit our 4 year value projections in under 12 months!!!  They are happy .... as am I.  Just some ideas to think about.  The sky is really the limit.  To me, the best course of action is to structure the deal so that it meets the investors objectives....some will want fixed return with less risk....others will tolerate a bit more risk for added upside.   And you can mix and match, not each of your 3 investors need the same structure.  Keep us posted on how you progress!

@Michael Wagner Great feedback thanks!  Are you finding your investors are happy to let their investment ride throughout the life/time of ownership that you as the proprietor keep the property?  Or do you use their money, pay them as structured, and refi when you have enough equity to pay them their initial investment back? Or what is the best way in this case to recoup 100% ownership the fastest?

Good questions...but unfortunately my answer is....IT DEPENDS:)!

Often times, my goal is to pay the fixed rate investors back as quickly as possible once I have stabilized the asset and can refi to conventional rates.  This is short term money and they are aware of it from the beginning. 

With equity investors, its a bit different as those are longer term relationships that I want to foster...so again I yield to their desires (within reason)...even in cases where the smart financial move (for that deal) would be to buy them out as early as is feasible....I will let them play longer (and make more money) and then buy them out when I know I have the next deal on deck.  This is good for them in that it keeps there money out to play and good for me in that I know their funds will likely be available for deal #2:)!

I also take into consideration how "fundamental" that investor was to the deal.  As an example, if one investor is the 1st to commit, I credit them with giving me the momentum to pursue the deal.  As such, I reward them with continued participation in the deal beyond what might be prudent on the surface.  Essentially, I reward them for making the deal possible.  Once I have one investor, I know I can get the deal done so the first is the most "Valuable" to me.  Note that these decisions are mine to make and they aren't made known to the investor until after the fact.  Its an "over-deliver" icing on the cake type of thing that breeds huge loyalty! In other words, even if my situation changes and I have the ability to buy them out early, i often keep them in until I at least hit the projections I used to get them on board.  

I feel like a lot of deal makers forget that we are offering a service to our passive money people and the better we treat them, the better we will do in the long run.  There's a lot of penny wise pound foolish borrowers out there. I try not to be one of them.  As they say,,,, Pigs get fat, HOGS get slaughtered.  I don't want or need to be a HOG:)

I couldn't agree more @Michael Wagner ....  My first thoughts/priorities would of course be to treat the investor as they should be and make the deal just as right for them as they make it for me, resulting in the likelihood of getting them in on the following deal.  I greatly appreciate the feedback, and would love to collaborate and learn more from you.  I'm brand new to this site so any tips/pointers/guidance is helpful! Thanks much :)

Another question coming from lack of experience is.... I have approximately $45k liquid equity in my current rental property, and $63k in my home, along with an operating LOC of $25k that hasn't been touched.... would you say that it would be wiser to use those monies to invest in the next deal, or use more outsider monies so I don't max myself out of available cash beyond comfort in case it is needed in the interim?

Paul, I'd say that depends on how confident you are in the deal. I want to be super careful with OPM. Maybe start small where you know you can deliver, and then build up both their trust and yours.

@Paul R Schiller another way you may consider structuring this type of deal is to create an LLC and then divide up the ownership and define the rolls in the operating agreement with you as the managing member. You will want to consult both a CPA (for tax implications) and a business lawyer to help set up the legal structure and documents in order to do it propertly. You need to be careful that you do it correctly in order to not violate any SEC regulations with regards to raising and pooling money.