So I was having another discussion with a friend of mine yesterday. He is my potential lender and has money to invest but is skiddish about jumping in. I told him that with his backing and my drive, knowledge and willpower we can make a good bit of money. His famous line is "If things go south all you would lose is time and effort, I would lose my total investment!" I told him that its my reputation on the line as an investor and also that we would analyze the properties before jumping in. What else can I say or do to convince him to take the plunge with me???
Real Estate Investor · Washington, DC · Member since 2014 · 236 posts · 328 votes
6y
Move on...plenty of money out there. If you are a street performer playing a saxophone and someone walks by without giving you money, do you keep playing and wait for the next passerby or do you chase after that person like a lunatic and say "don't like saxophone? I got some bowling bins I can juggle for you? How about a unicycle?"
I get your analogy but I havent ran across too many lenders willing to put up money. Especially on here, mostly people who want to get started in investing and looking for lenders.
Investor · Dallas, TX · Member since 2009 · 718 posts · 913 votes
6y
If you are brand new, I completely understand your friend's reluctance, particularly if you don't have any skin in the game. Any HML (including any private lender) is going to want you to have some money in the deal, enough so that you will take a hit too, if the deal goes south. Keeps incentives aligned.
Specialist · San Antonio, TX · Member since 2012 · 865 posts · 351 votes
6y
@David James your friend is taking the biggest bulk of the risk in IMO. He is clearly uncomfortable with fronting all the money.
Your reputation is on the line was part of your comeback. What kind of reputation have you built that is so vauble? Maybe with such a high quality reputation you can find a different money partner.
I think you took that out of context. IMO, I would think your reputation would be very crucial when trying to establish yourself as an investor. I am talking about future reputation because if i let my first deal go south then NO ONE will want to work with me after that. What kind of reputation would I have after that? None because I would crash and burn from the very beginning. So i would want to protect his money like it was my own. Besides, why are all the podcasts and webinars on here saying that "I did this deal with zero out of my pocket and my friend put up the money?" Someone has to take the risk, I dont have much money to get started, but once we would do a few deals then of course I would put in my half.
Investor · Flower Mound, TX · Member since 2016 · 17 posts · 17 votes
6y
@David James in my opinion your friend is taking most the risk. Actually it’s not an option it’s a fact. My advice: If you are just getting started then take a lower percentage on the first few deals, prove out your model to the investor, then get a higher % going forward.
Business is all about solving problems and providing value. You have your first opportunity to solve a problem for someone.
Clearly, like Mike pointed out, your attempted solution of equating your reputational risk with his monetary risk didn't pan out.
Move on to the next option or sit and bemoan the fact that someone won't hand over a pile of cash to someone who doesn't want eat their own proverbial cooking, up to you.
Some options:
-Up his interest rate/ percentage of the profits to account for his risk
-cross collateralize
-sell somethings you own to bring some cash to the table
Thanks everyone! Great options, can anyone turn me onto a HML that is willing to work with someone new? I understand that I would get a lower rate, I am fine with that.
Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
6y
@David James I have to agree with your friend . He has way more to lose . Unless you have more than 2 or 3 completed deals , Sorry , you dont have a reputation . And a future reputation ? Really ? Honestly If they are a good friend , I would look at other options , you can always make money thats easy , good friends are a whole lot harder to come across
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
6y
@David James your friend Is correct. They’re taking all the risk. Your reputation is you are a total newbie (not sure in your case), isn’t worth anything because you don’t have a reputation. Your friends hard earned cash though has lots of value.
Secondly, your friend is a tire kicker, they’re not going to lend you the money. You’re best option is to do a few deals on your own first, with your own money
Contractor · Oxford, MA · Member since 2018 · 807 posts · 745 votes
6y
A HML will want you to put skin in the game too. I don't know anyone that would be willing to led a newbie 100% on their first handful of deals. Either learn what you're doing before you do it (LOTS of research and learning your numbers) so you can convince your friend that you're not going to lose their money or save enough to have 15-20% of the purchase price. Most HML will loan 80-85% of the purchase price, 100% of the rehab with a total not to exceed 70-75% of the ARV. At the end of the day though, if you can't convince your friend, then you don't know your numbers good enough to get a HML. It isn't as simple as "hey, I need $200k" "ok, here's a check"
Maybe I didn't explain myself well enough. I didn't just say "hey I need 200k". I analyzed about 120 different properties, narrowed that down to 3 that really had potential. I then invited him to do the walkthroughs of the 3 places. He didnt want to do it but I did it anyway. If for nothing else just the experience. Printed out the PDFs from the calculators on here and presented them to him. It's ok, I'm not complaining, I dont want to force him into something he isnt comfortable with and destroy a friendship. Was just asking for experience when I deal with a HML. If all of them want me to have skin in the game then what percentage is the usual amount that gets split like 90/10? 80/20? What about term limits? How long for ROI? What can I do if I only have like 5k to start?
Real Estate Agent · San Antonio, TX · Member since 2017 · 814 posts · 466 votes
6y
Not sure of your partnership details, if he is the lender, and you have done your homework of the investment, offer him some extra %. Or look somewhere else to see how it compares with his willingness.
Investor · Johns Creek, GA · Member since 2017 · 463 posts · 488 votes
6y
You friend is right. He is taking all the risks. He is essentially paying for a product without the guarantee to be delivered. That product is "money" (return on investment). If you haven't shown him that you have the ability to deliver the product, why wouldn't he feel uneasy about it? One has to have 3 things to want to buy a product: 1. A true need. 2. The right budget 3. The decision making authority. If they lack any of these three, there won't be a sale. Your friend is probably lacking the "true need". He probably doesn't want it that badly, or he probably doesn't think he has a true need for your product which in his mind is a "high-risk" investment without the promise to have solid returns. You need to convince him that what you are offering is indeed what he needs - a solid investment with high returns, with mitigated risks. Some investors have lower risk tolerance and might not be the right fit for someone new without a track record. Try looking for someone with higher risk tolerance who is looking for the product you are offering. Syndication is an area you cannot make a mistake in. Because if you make a mistake, other people lose money. When people lose money, they remember you forever and that's really really bad.
Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes
6y
There are plenty of HMLs out there that will lend to a newbie, but you'll need more than 5K to make a deal work. You could consider having your friend help on the down payment and closing costs rather than front the whole amount. You could also present your friend a debt position rather than equity if he has good reason to believe you'll perform on your loan whether you make or lose money. Do you have real estate experience yet or would this be your first foray in real estate entirely?
Real Estate Investor · Los Angeles, CA · Member since 2013 · 50 posts · 12 votes
6y
@David James
HMLs all have their own lending parameters. On your first deal you'll probably be able to get 85% LTV on purchase and 100% of rehab cost.
Given your friend’s apprehension about being the primary investor/lender I would use a combination of your capital (5k), a smaller amount from your friend and hard money. The hard money may be a little more “expensive” (higher interest rate) than your friend funding the whole deal but they’ll help you. They’ll ask questions that you may not have thought of yet and they won’t lend if they don’t think it’s a good deal, which should be a red, at least yellow, flag to you.
Investor · Austin TX · Member since 2016 · 1k+ posts · 2k+ votes
6y
@David James First of all, I dont blame your friend for being hesitant. He is tight, he stands to lose his cash if things go south and its hard to convince someone that you know what you are doing when you have no track record. Second, Hard money lenders dont do deal splits. They lend you some percentage of the total amount of funds you will need for the purchase and rehab of the property. They will require cash from you up front (points) and you will make interest payments monthly after you purchase the property (also closing costs, inspection fees, doc prep fees, etc) So if you only have 5k I think you might want to consider waiting to invest when you have more cash to contribute.
Another option would be to go out and find a deal yourself (NOT a house thats just listed for sale on Zillow/MLS) go out and find an off market deal and take it to an experienced investor and offer to partner on it. Also offer to do any labor that you can reasonably do on the property (painting, demo etc) and use this not only as a great learning experience but also take your portion of the profit and then go do your own deal.
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
6y
@David James there’s not much you can do with 5k. Between points, title/attorney fees, taxes and insurance, most of that will get spent just buying the property. Then what?
A hard money lender will also never give you money up front for rehabs, which means you need to front the money yourself and then get reimbursed from the lender. So If you wanted to do any sort of rehab, keep that in mind too.
Bottom line is you need more cash, probably significantly more if you were trying to get a 200k loan.
There are lots of podcasts and articles on BP about investing with “no money down” but the reality of that is much much different than the articles and podcasts will make it seem.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
6y
@David James your friend is taking all the risk. You don't have a reputation to lose at this point, because you have never done a deal. If you fail on this deal, you will just find a new person and start from scratch. It is not like everyone in the world will know you failed.
Down the road as you do more deals, then yes you have a reputation.
You will also hear people say on podcasts that leverage reduces risk. What they mean is if something goes wrong, it is the lender who out the money.
You have to have skin in the game. Do you have anything of value you can offer up as collateral? Furniture, jewelry, paid off cars or a lien on your personal home? If he thinks you stand to loose everything, he will feel like you have skin in the game.
@David James. Honestly sounds like a losing deal for him only if things go south.. you’re saying your reputation I’m sorry but that’s laughable you don’t have any skin in the game you could have the best reputation in the world and I wouldn’t let you use my money you gotta bring your own money if you want to use someone else’s. If things get too deep you could walk away a reputation is nothing compared to lost money. You need to get your own capital