Is 6% a good rate for being a silent partner?

25 Replies

A developer I vetted has invited me to invest in his projects as a silent partner paying 6% interest with monthly payments.

His projects are socially responsible, which is important to me.

Is 6% a good rate?  Someone in another thread mentioned they were getting 9% so that made me wonder.

Thanks for your tips!

I personally would want 8% with a 50-80% profit split for me.

Originally posted by @Olivia C. :

A developer I vetted has invited me to invest in his projects as a silent partner paying 6% interest with monthly payments.

His projects are socially responsible, which is important to me.

Is 6% a good rate?  Someone in another thread mentioned they were getting 9% so that made me wonder.

Thanks for your tips!

No why not 12%

Originally posted by @Olivia C. :

A developer I vetted has invited me to invest in his projects as a silent partner paying 6% interest with monthly payments.

His projects are socially responsible, which is important to me.

Is 6% a good rate?  Someone in another thread mentioned they were getting 9% so that made me wonder.

Thanks for your tips!

I've seen a lot of different things. 6% is generally the lowest I've seen but it can stretch up to 12%. I really believe it should be based on your personal situation and your relationship with the developer. How well do you know this guy? Do you have a lot of experience with him either in business or just in a general friendship? Is he just an acquaintance?

The closer you guys are, the more (in my humble opinion) it makes sense to ask for smaller percentage of interest, and maybe a percentage of the profits as suggested up above.

If you guys aren't really all that close and are more of acquaintances than anything else, then having a higher interest rate makes more sense in my opinion. You don't want to over-leverage him and make it harder for him to make the deal make sense.

Lastly... what does your personal situation warrant? Are you taking the money from a different account with a low interest rate and investing it with him to get a higher interest rate? (charge a higher interest rate to get the $$$ return that you want). Do you just have the money sitting around and not really in need of more money? Then the 6% may be plausible for you.

These are the things I would think about when I get in your position to be able to provide loans for others.

Thanks for your replies and questions.

The developer has been a client of mine for legal work for several years.  I've been involved in some of the paperwork for his gated communities so I've seen recent deals and how they have worked out.  His communities are top quality B properties with mostly green building methods.

We seem to be on the same page ethically.  But if he is offering me a low rate then I wonder at his personal ethics regarding if he offering me less than market rate and no share in profits.  But I would not be investing lots, so no share in profit might be customary.

I'm still studying to become a real estate investor/owner and not ready to purchase.  I have been considering the 6% as dependable return better than banks and credit unions.

I'd love to read what rate silent partners have been getting.  Thanks for posting!

6% isn't bad, esp if comparing to what most are getting in the accounts you've mentioned. Might be a good introduction for you for a fraction of your funds.

absolutely not. 6% should come with relatively low risk.  

Development deals are very high risk.  Why do you think sophisticated lenders like HMLs take 12 to 14% plus 3 to 5 points for that kind of deal?  The only thing green about this is the developers profit while he puts the risk on you.  Just say no 

I agree with @Anish Tolia , just say no!!!  It is completely unethical to offer 6% on a high risk project.  The developer is sophisticated, probably knows you've never invested in a project like this and is seeing what the lowest rate he can get away with and use your money to make himself a handsome return.  I guarantee if someone asked him to invest in their project and promised him 6% return he would probably laugh at the ridiculous low ball offer.  

The returns I've gotten: project A 13% plus 1 point. Debt financing so monthly payments

project B: Equity split total return 30% no points. No monthly payments, just a lump sum at the close of escrow.  

Currently working on project c equity partner.  My target return minimum is 18%

@Jeanette A. . Those are the right kind of numbers. I get 12% on passive diversified lending funds (no effort on my end and diversified risk across many projects) and shoot for 18% on my own private lending where the loan is all on a single property and I do the work of qualifying it. Its really sad to see developers and flippers comparing their 6% with a savings account yield as if they are the same kind of risk profile.

@Olivia C.  6% is less than I pay my commercial bank for A and D or construction I pay 1 point and 5.5% and I borrow at the best rates available.. anyone getting funds cheaper than me is getting them from ONLY family who is subsidizing a relative or frankly someone who does not know any better ( you) and I don't mean this as condescending its just a fact... 

I suspect your going to get 100 e mails from BP folks wanting to up the offer to 8%  LOL

but we don't know the specifics other than what you have described and like Anish states development deals are very risk heavy.

It depends on what's important to you. You mentioned that it is important that this project is socially responsible. Is that more important than the highest returns?

If you didn't invest your money here and now but invest somewhere else, how soon would the pay off be and at what percentage? If nothing else is lined up, would you be better off sitting on your money instead of investing (for a profit) to create something valuable to society?

Figure out what is important to you, what your needs are, and I would calculate the personal value in knowing you're doing something you're happy to be a part of.

You are not a "silent partner". You are a lender. A partner will get s,one of the profits. 

I say "no way Hosea" 

YES YES YES silent no problems no worries secure reliable yes yes yes 

yes you can always  speculate and get more OR  LESSSSS

Originally posted by @Jacobus Bor :

YES YES YES silent no problems no worries secure reliable yes yes yes 

yes you can always  speculate and get more OR  LESSSSS

 If you didn't already have 50 posts I would think you were @Olivia C.'s developer that she is in the process of vetting.

Why the enthusiasm? Most everyone else is saying she should get more.

@Olivia C. Test his confidence in his project by having him pledge his personal residence as additional security for your funding.

I don't think we are at the top yet but new developments crash fast when they can no longer presell from their models.

There are safer investments WITH better returns!

My mind boggles at the notion of a "socially-responsible" gated community.  Almost a contradiction in terms.

But to answer the question, 6% is too low.

Originally posted by @Richard C. :

My mind boggles at the notion of a "socially-responsible" gated community.  Almost a contradiction in terms.

But to answer the question, 6% is too low.

 The gates are only so the specially bred methane free goats can mow the lawn. 

The time commitment on your capital is key. The sooner you get your capital and return back the less chance of a market shift.

I really do not see anything wrong with a sponsor trying to get the cheapest capital they can for a project as long as the investor is accredited and proper disclosures have been made.

It's all relative. A new person with no track record or experience might offer to give you super high returns for your capital but likely they cannot get the money elsewhere. So you might get more or might lose all your money due to their inexperience.

Conversely someone who has a long track record of success will demand a lower percentage because they have proven themselves over time. Not a sure thing but usually a greater chance of success. It's all about what side of the fence you are looking from.

A borrower does not want to encumber themselves with highly loaded debt that sucks out all of the cash flow and most upside of a project. If a borrower can get a construction loan with interest only payments then that is great. I have seen 4% from some aggressive banks and up to about 5.5 currently. Some are fixed and others will put in debt to be no less than say 5.00 but prime plus 125 points. So if debt rates start increasing it is plausible in that situation that the bank loan rises to 5.25 or 5.50.

We see this in retail type projects but even if the rates rise signing up of tenants and income is starting to come onboard to offset. Eventually you want to convert the construction loan to perm. Key is to make sure the bank gives an option to convert with them but you are not required to or have a pre-pay penalty built in. Also that you can get extensions on the loan if needed.

Some banks are paying 1% so 6% isn't bad. It is all relative to the individuals situation. As the profit percentage requested goes up the interest rate on the loan should go down. There has to be give and take. If the sponsors cost of capital rises too high then the project does not make sense to do.    

Without reading the other replies, or knowing more, I'd have to say "no" for one reason: Your 6% is NOT risk free and is NOT diversified. It is probably not secured either. You can get a superior return through lending club lending to hundreds of individuals, thereby eliminating the risk of "having your eggs in one basket."  To put it in simpler terms, you're being asked to take on risk appropriate for a 12-15% return in exchange for a 6% return. This statement has little analysis behind it, but I don't think you'll find much vehement disagreement. 

After reading a couple of these posts, I'd urge you to not jump to the suspcion that the developer is trying to take advantage of you. Speak frankly with him and tell him candidly of some advice you've gotten (i.e. 12% for risk vs. 6%) and see if he presents a good case. All ego and defense = he's probably trying to take advantage. Openness and straight talk = he offered you what he thought was fair and has confidence in his ability and will probably negotiate upward. 

Originally posted by @Richard Dunlop :
Originally posted by @Richard C.:

My mind boggles at the notion of a "socially-responsible" gated community.  Almost a contradiction in terms.

But to answer the question, 6% is too low.

 The gates are only so the specially bred methane free goats can mow the lawn. 

What, and now the socially-responsible gated community is using genetically modified goats???

6% is nothing wrong, the socially responsible ????? Hey this is investing its about MONEY

money is cold and should be calculating and if your risk factor is real low than 6% is OK

Take a look at self storage as  the risk is spread out over many customers and thats why self storage has done so well even during the last recession  . I am  own self storage in Germany and there are so few out there ,the risk is real low and the growth is much higher as the business is still in its infancy . Read the latest report from Bloomberg and FEDESSA 

Europe  2015  and good luck to all of you 

Is the money safe? Will it be a loan or will you be an equity partner? You can find private money from 6% on up to 12% and higher. What is your involvement? Partner or strictly a lender? Will you have 1st lien with very low LTV or will your loan have more risk? I have private lenders that offer 6.25% which is pretty low compared to most lenders. I have other that charge 7% and I feel that is reasonable as well. Someone offering 6% is certainly not unethical in any manner IMO. You can accept that, counter, or walk. If you have ownership in the project vs strictly doing a loan, what do you stand to gain?

6% return might be enough for some people but certainly not me. My guess is you can do better. 

Are you happy with 6%? That is the important question.

Any investment is worth it if you are happy with the returns and happy with the product. You could easily make more returns with a model that is more aggressive.

Olivia C. , only you can answer if 6% is right for you, but here are some questions to ask yourself:

How much risk is there in this opportunity?

How committed is the developer to have you as a silent partner? The initial offer of 6% suggests not very motivated.

How long before you get your capital back?

What other opportunities do you have access to and how does this rank amongst them?

I can tell you that I have lent from 11% to 19% and sometimes even higher.

If you are an accredited investor then you know there are many opportunities out there.

Cheers
Percy

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