Pooling Private Funds for investing - what rates to offer?

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Taylor L.
Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
4y

First focus on getting the legal structures in place. It's not as simple as just starting an LLC, making an OA, and getting a bank account. Make sure you talk with securities attorneys who can help you do this in a compliant manner.

Search the Fund of Funds model on BP and Google. Lots of information out there on how to get started.

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  • Taylor L.
    Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    4y

    First focus on getting the legal structures in place. It's not as simple as just starting an LLC, making an OA, and getting a bank account. Make sure you talk with securities attorneys who can help you do this in a compliant manner.

    Search the Fund of Funds model on BP and Google. Lots of information out there on how to get started.

    2Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    4y

    @Eric Hempler so what TYPE of real estate are you looking to invest in?  The post above is accurate....if you are working on apartment complexes, etc.  But if you are just buying single family homes that's different.  Can you tell us what you are thinking and maybe that might get us to a better place to recommend?

    1Reply
  • Eric Hempler
    OP
    Accountant · Apple Valley, MN · Member since 2009 · 38 posts · 10 votes
    4y

    Apartment buildings and smaller retail spaces that I feel will have permanent tenants. 

    I'm not sure what specifics you're looking for. 

    I was thinking of starting with 4 unit buildings, but I think I'm learning toward 6 - 30 units in the beginning. At least that's what's common in my area. Not sure when or if I'll pursue the big complexes in my area. 

    0Reply
  • Eric Hempler
    OP
    Accountant · Apple Valley, MN · Member since 2009 · 38 posts · 10 votes
    4y

    @Taylor L., 

    I'm not familiar enough with this term to know what I'm looking for in search results. 

    I have course material that I compelted that talks about how to get private lenders and material on pooling funds that I'll be reviewing this weekend. 

    I guess what I was trying to drill into was how I should go about setting my interest rates for those that lend to me. 

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    4y

    @Eric Hempler ok, this is all very important.  Buying 4 unit, residential buildings is VERY different than buying a 5 unit residential home.  That's the cutoff.  So 1-4 = residential.  That's residential lending.  5+ = commercial lending.  If you want to research Commercial Properties and Apartment complexes there's an entire forum for that - under the "Commercial Forum".  This one....you can post here for that stuff but we are mostly residential.  You'll get TONS of responses in the other forum and you can read lots more posts related to what you are asking.  The term you should research is "Syndication".  That's what you need to know when raising capital in the multi-family space.  That's what @Taylor L. was referencing in his post.

    Hope all of that makes more sense.

    1Reply
  • Chris Levarek
    Real Estate Syndicator · Phoenix, AZ · Member since 2018 · 903 posts · 1k+ votes
    4y

    @Eric Hempler Every deal and asset type will vary the interest for investors or private lenders. This being said, 8-10% for private lenders is common and investors looking for returns, usually look for 12-20% with 15% being the standard for many groups. 

    Two points here to note :

    1. Not all investors want returns only. Many are looking for tax benefits, tax deferral options and inflation hedges.

    2. Hard money is 7-10% right now, so private lenders have some competition. Thus rates could be negotiable.

    I recommend, If you are going to be working 6+ investors on a deal, definitely call up a securities attorney and have that talk. You will need the right investment documents set up to take capital. Fact, just have the call to get some further info on what's possible or not.

    2Reply
  • Eric Hempler
    OP
    Accountant · Apple Valley, MN · Member since 2009 · 38 posts · 10 votes
    4y

    This doesn't quite sound like the material I've been going through. 

    The private lenders discussed are typically individuals looking to get a better return than they would in a CD, IRA, or 401K. This was the target audience discussed anyway.

    In the material, I was going through the mentioned offering 6% to those that wanted a monthly payment and 8% to those that are willing to let their investment accrue. 

    I'm sure there's more than one way to do this. Just not sure the discussion is quite going in the direction of what I was originally trying to research. 

    The other item was that he really only offered two options for interest rates versus having all kinds of different options.

    0Reply
  • H. Jack Miller
    Lender · Boca Raton, FL · Member since 2014 · 250 posts · 133 votes
    4y

    I would deal with the legal side first and there are some securities laws relating to this. I would 100% start there, if you don't follow them it can be very serious. Then everything will fall in place from there.

    0Reply
  • Eric Hempler
    OP
    Accountant · Apple Valley, MN · Member since 2009 · 38 posts · 10 votes
    4y

    Are you saying legally I can only offer certain interest rates? This seems to be repeated over and over in this thread. 

    I do have an SEC attorney bookmarked. 

    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    4y

    @Eric Hempler

    You can offer whatever return you want. Questions are:

    1. Are they providing you a note with you signing and giving a personal guarantee or are they investing in the syndication?

    2. Who is your audience ? I assume you would do a 506c which allows for accredited only.

    3. Asset type matters and are you getting leverage? This is important as if you have IRA investors and leverage they may pay UDFI which is a negative to them

    4. Are you taking a management fee? Does this come after investors are paid or before?

    5. You said 6-8% - is there a waterfall for express distributions?

    6. What is the hold time and is their early termination for penalties?

    These are things to think about as you structure the fund as you want to entice people to invest and ask the question why your fund over another

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  • Jeff SchemmelBusiness Member
    Real Estate Agent · Saint Paul, MN · Member since 2014 · 384 posts · 401 votes
    4y

    @Tim Swierczek may be able to provide some advice here.

    1Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    4y

    Is the capital you are getting a loan or equity investments?

    If they are equity investments, you are not providing an 'interest rate', you are providing a return on their investments.
    The return you provide to them will depend on how good your investments are.

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  • Eric Hempler
    OP
    Accountant · Apple Valley, MN · Member since 2009 · 38 posts · 10 votes
    4y

    I would be contacting individuals to raise funds to purchase small rentals, apartment buildings, and small retail spaces. 

    I was looking at rates for CD and trying to come up with some ideas I could offer. 

    I'm leaning towards simple interest payments to the individuals of 

    If they want a monthly payment it would be 4%. 

    If they're interested in letting the money accrue I was going to do 

    6% if they let it accrue 2 - 3 years and 7% for five years or more

    I'm planning to buy and hold the properties. When someone is looking to cash out I would put another invester in place. 

    I'm still trying to find a SEC attorney. Haven't gotten responses yet out of the 30 I've tried to reach

    1Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    4y

    @Eric Hempler

    I have an attorney who can create your docs but not he is not in MN if you had to have them in that state

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  • Tim DelaneyPro Member
    Buffalo, NY · Member since 2018 · 790 posts · 530 votes
    4y

    @Eric Hempler I think you should clarify your terms - your initial post made it sound like you were looking for investors as in partners/equity holders which is different than just looking for lenders. If you are giving equity you should read up on syndication.

    From your subsequent posts what it sounds like you’re actually looking for is private lenders. If you plan to use this private money for the down payment portion of your purchase be aware that some banks won’t like that they want to see your own money in the deal.

    As for your interest rates 4% sounds pretty low. Especially if this is your first deal. Many syndicator‘s are offering 7 to 9% cash on cash return and that also allows the investor to keep some of the equity get depreciation benefits and get tax benefits. 4-6% is also below depreciation and lending to you has more risk than buying a CD from a private lender perspective.

    As for differentiating between residential and commercial, Andrew is correct, however if you plan to purchase as an LLC then even a single family will be treated as commercial loan by banks.

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  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    4y
    Quote from @Eric Hempler:

    I decided to pool funds from individuals to start investing in real estate. 

    What interest rates might I want to offer to my investors? Any guidelines I might want to use/ 



    The guideline we use are the stock market, bonds or high rate annuities.  And we offer more more than an investor can get in those type of investments.  
    312-681-7487
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  • Chris John
    Member since 2020 · 671 posts · 937 votes
    4y

    @Eric Hempler

    I'd think you'd want to offer as little as possible while still being able to get the money, but especially not offer more than you plan to make.  Do you have an idea of how much you will make on these investments?  It might be easier to calculate that first and then backtrack to see what you can afford to pay. 

    Also, and please don't take this the wrong way, but please be careful with other people's money.  I've been investing successfully since 2009, but still don't consider myself competent enough to invest with other's money.  What you are considering is serious business and, quite frankly, you sound a little green.  Please don't take this as me saying you're not capable of it, but just as a general warning to be extremely prepared before you start accepting money from other people.

    Best wishes

    0Reply
  • Eric Hempler
    OP
    Accountant · Apple Valley, MN · Member since 2009 · 38 posts · 10 votes
    4y

    I'm looking to streamline this a little bit, but still trying to nail down an approach that might make sense. 

    The way I was thinking about it is I used Bankrate.com and looked at the different term length they had for CDs

    On a monthly CD it's 0.2% on Bankrate, adding 3% to that would be 3.2, rounded up to 4% (I can see where this may need to be higher due to inflation....maybe those that receive a monthly payment should be 6%, that way it's twice the inflation rate?)

    The longest term had 3.5%, adding 3%, bringing it to 6.5%, rounding up to 7%

    I'm leaning towards offering 4% for those that want a monthly payment and 7% for those that are interested in letting their money grow. 

    yes, these would be private money lenders

    My rationale for using Bankrate is it's using data from several banks and I can see who's offering the highest. And it's also easy to navigate and find the info I'm looking for.

    I'm not sure what other sources I should take into account, but this is the starting point I've been playing around with. 

    In looking at the stock market, I see one source says it's about 10% a year..how many people are actually receiving that though? 

    This is the area I'm trying to iron out right now. Otherwise, I have a pretty solid accounting background for this. 

    I talked with an SEC attorney last week and he said you can really do it just about any way you want. I'm really trying to nail down something that makes sense without additional items like points, the share of the investment, etc. It's just a dollar amount and I pay simple interest to use those funds. 

    I'm open to other ideas, just seeing how simple I can make this before I look into other ideas. 

    0Reply
  • Eric Hempler
    OP
    Accountant · Apple Valley, MN · Member since 2009 · 38 posts · 10 votes
    4y

    The other thing to keep in mind is my intention is to buy and hold. 

    I plan to invest in multi-family buildings and small retail spaces.

    Ideally, I'd like to have private lenders that are long-term.

    0Reply
  • Percy N.
    Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 904 votes
    4y

    @Eric Hempler not sure what course you are following, but if you find someone willing to make a private loan for 4%, let me know, I will offer them double.

    We normally accept and make private loans in the 10-15% range (sometimes even higher, depending on the circumstance). 1-2 points upfront and 10-12% is the average for private money or "hard money" loans in our market. If you are lucky, you can find it cheaper.

    Private investors are typically successful business people who understand the time value of money and are willing/able to take some risk for risk-adjusted returns.

    Comparing private lending interest rates to CDs or Bonds is comparing apples to oranges, just like it would be to compare Realestate to say Crypto.

    1Reply
  • Percy N.
    Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 904 votes
    4y
    Quote from @Eric Hempler:

    The other thing to keep in mind is my intention is to buy and hold. 

    I plan to invest in multi-family buildings and small retail spaces.

    Ideally, I'd like to have private lenders that are long-term.


    Then your best bet may be an agency lender or other "traditional" lending institution.

    Talk to a lending broker to see what may be the cheapest capital for your asset class.

    0Reply
  • Eric Hempler
    OP
    Accountant · Apple Valley, MN · Member since 2009 · 38 posts · 10 votes
    4y

    @Percy N.Not sure we're using the same definition for Private Money. 

    When I say private money I'm referring to individuals and not businesses. 

    0Reply
  • Eric Hempler
    OP
    Accountant · Apple Valley, MN · Member since 2009 · 38 posts · 10 votes
    4y

    ok...I think I'm finding the private lending course I took might be slightly dated. This means, that what I should be searching for is real estate syndication info. This seems to tie into some of the previous comments about different equity positions and returns. 

    1Reply
  • Austin Johnson
    Investor · Jefferson City, MO · Member since 2020 · 190 posts · 178 votes
    4y

    @Eric Hempler inflation isnt 3%... it's near 8.5% per the last update.
    a CD is a stabilized investment with no downside. I'm certain we can all agree real estate has potential downside. this puts massive risk to the investor vs a cd. the more risk, the more return.
    Stock market average is 7%. I can put $100k into the market and get $7k return on average. why would someone risk more for the same return with a new investor? this isn't meant to tear down the idea. in fact I'm 100% in favor of syndications. it's to say raise the return to investors. 
    you want to raise the equity needed for down payment. then promise those investors a set return on their investment and use the property as collateral. dont try to reinvent the wheel with a very dated book.  there are thousand upon thousands of successful investor that came before both of us. if this avenue you speak of was feasible, it would already have a catchy name to it and be popular. 

    0Reply
  • Percy N.
    Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 904 votes
    4y
    Quote from @Eric Hempler:

    @Percy N.Not sure we're using the same definition for Private Money. 

    When I say private money I'm referring to individuals and not businesses. 


    Yes, so am I.

    I do private lending myself and would get at least 2-3x what you want to pay.

    We also borrow sometimes and pay 10-12%

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