Dumb down how private investing works. How long paid?

Question

I am new to this whole thing. I don’t have money to start purchasing real estate so the only option I have is through private investors. Can somebody please explain how the process works. What are the steps. What do investors typically get paid. I don’t understand how an investor throws down 70,000 for a 300,000 complex. Leaving me to still get a loan through bank. How do I make money and the investor?

Kevin Dougherty · Answer

Congratulations on getting started. First step is to obtain some basic knowledge of financing the types of property that you are interested in. There are plenty of great books right here on bigger pockets. Be sure to listen to the BP Podcast and follow the forums.

Now to how the Private Investor makes their money. There are many ways this can work, they can partner with you 50-50 and maybe they supply the cash for the purchase and rehab and you supply the heavy lifting and find the property, hire and managing the contractors. When the project is completed and you either Flip out of it or BRRR it, you can split the proceeds from the Flip or from the monthly cash flow on the BRRR.

Another way is for the private investor to loan the money for the acquisition for 6 months to 1 year and they receive a certain % of return on the money that they loaned to you eg: they loan you $50,000 with and 8% return for 1 year so they would receive $4000 from you ($50,000 x 8%) plus you still owe them the original $50,000 that you borrowed. For further enticement the return could look like this: a certain % on their money for what is called a preferred return (they receive this before any profit sharing) and then they receive a % of any profits that the property makes in any given situation, Fix & Flip or BRRR.

There are many ways for this to work but you will have to understand exactly what your private investor is looking for in a return and you should provide them with assurance that their investment is protected as best as it can be via things like them having 1st position on the deed, promissory note signed by you for repayment, the property is purchased at such a discount that if you had to sell it in 30 days in its present condition, they would receive their investment back from the sales proceeds, etc...

You will want to speak with all of the professionals on your team such as your lawyer and accountant to determine how to legally structure the transaction.

I have not even scratched the surface here on how this all happens so its best to get educated. Join your local real estate investments groups, network with like minded people, read the books and listen to the podcast. Learn the language so you can get into the game.

Good luck.

Justin Abdilla · Answer

@Kevin Dougherty has a wonderful answer here.

I just want to expand that the private lenders I know would rather take the preferred distributions.  Taking the $50,000 with 8% guaranteed return example, it is true that a preferred lender has the right to get 8% guaranteed return before anyone else (basically taking $50,000 to give a $54,000 lien), but we commonly do see a structure where they have a buyout option at a future date.  I've seen and written buyouts where the preferred lenders can exercise an option to cash their stake after 90 or 180 days to get out of the property.  I personally find those very appealing to the private equity lenders, because they're both guaranteed to get paid and guaranteed to get out.

Planning is key.  If you have no money to invest in something, then find a small project that can be financed by one or two private investors.  Figure out how you create value to their money.  If you're just buying the property with their money, well dang, anyone can do that.  What do you do that's different than what they can do with their money?  How are you the best steward of this $100,000 or $300,000 or whatever.  I think you could really profit from circling back and doing a business plan of how you plan on acquiring, rehabbing and liquidating your target properties so you can figure out what your competitive advantage is.

I'm sure this is just the first step to you making a mint of money, and I hope to see your deal diary in an upcoming post a few months from now.  Best of luck!