Using other peoples money
I am sure this is dependent on a lot of variables and how the deal is... But I am curious to learn.
I see all over the place saying to raise funds for deal from other people. They're talking about friends, family, investors, etc. When going that route, how are you making the deal appealing to them? Are you promising a certain amount of money per month then a lump sum to cover the rest in a few years? Are you using their money in conjunction with a loan/mortgage (from bank)? Will you only take the money if it covers the entire cost of the property or will you take what ever they're willing to give you? Are you required to file with the SEC or something? I've seen a ton of information online and on here, but really it's just too much information. It's hard to decipher what would work and what wouldn't. So examples would be cool to see.
Thanks!
Most Popular Reply
Hi Jonnathan,
Generally, the majority of the project costs are covered by financing. The money that is raised is used to fund the loan down payment, renovation costs (sometimes these are included in the loan), and all other costs associated with closing the deal.
In return for investing, the passive investor is usually offered a preferred return. Preferred return isn't a guarantee (you never guarantee a return to passive investors!). Instead, it is paid out of the cash flow (income - expense - debt service). Any profit remaining after the preferred return (including the proceeds at sale) is paid out is usually split between the passive investors and the sponsor.
The preferred return and profit split are all negotiable.
This first option is for equity investors. You can also bring on debt investors. In which case, you offer a fixed interest rate for a set number of years and then return all of the capital.