Is there a 'Appropriate Minimum Interest' to offer to PM Lenders?

Question

Hi,

A short background; I have purchased my first duplex within my SDIRA for all cash and have it rented. Could not get non-recourse lending due to an 'ineligible property class' that most of the other duplex or triplexes will also fall into. Too old, not expensive enough etc... I have what I would consider an exemplary business reputation of over 20 years in my town in the construction industry working on projects from 10K to 100K+. I also have a 'mentor' in the form of an employee/relative (who happens to work for me) that has 10+ years of experience with owning/managing about 10 units of his own with an excellent reputation both within our business community and as a Real Estate Investor/Landlord.

I have started to put together a list of potential private lenders after doing a lot of reading here. I have roughly 150 names, of which I am ready to do a 'test sample' with a couple of them that I am very comfortable with, and I think they with me also. My approach for this 'sample' is going to be "Here is what I have been investing in, what returns I expect, how I have been financing it etc..." and "this is how I see an opportunity for those interested becoming Private Lenders to participate and receive a pretty good return on their funds" (I am working on better wording for this).

I envision these potential investors falling into 2 groups primarily. Those individuals with a high nets worth who are not really interested in doing things like real estate investing themselves, but would like to diversify, and understand that it can be a great avenue but want to let someone else do the day to day of it. The others would be people a bit more like myself who have most of their assets tied up in either their own houses/farms or their retirement accounts. I envision them diversifying those IRAs etc...by putting their 'lower risk portion' (think usually CDs etc...) into Private Lender loans for anywhere from 3year to preferably 15+ years.

MY QUESTION; Is there a 'minimum' rate as a 'general rule of thumb'? Of course Im sure people see all kinds of scenarios out there. As a VERY rough idea what I am thinking is this; If 3 year CD rates are at 3%, offering to borrow at say 5%. If 15 year rates are at 4%, offering to borrow at 5.5 to 6%.

I know this probably seems low to some of you, but I know a couple of these people well enough to have an idea of how much they have invested in what kind of items.

Thoughts?

Thanks, Dan Dietz

Matt B. · Answer

It's funny how we have these nuances of what we like to call our projects. We actually prefer to call ours investments and for the exact same reasons Bill did not want to call it an investment. We want our investors to talk to their attorneys and CPA's. We want to be perceived like a REIT, private equity or hedge fund would be, which in essence we are, albeit on a smaller scale. Of course we have lost investors after they talked to their advisor, but they probably shouldn't have been in our deals anyway.

The term I don't like to use is lender. I do not want to borrow money from people. We offer an investment opportunity that someone can choose to be a part of or not. (I don't know if anyone advocates it here, but I have heard some say that if you use the term lender its not a security. It doesn't matter what you call it, security laws apply either way.)

Our model is probably not for everyone. You have a great game plan, find out what works for you and raise the capital you need. Much success.

Daniel Dietz · Answer

Bill, you wrote

"""Use an LLC and admit them as a member, use the capital contribution and  the operating agreement to use the funds, this will keep deeds off the  property that can lead to lending issues. Use an attorney! :)"""

I think I understand what you are saying here. Is there a 'term' or 'phrase' that describes that type of agreement that I could search here to learn the concept more in detail? I like to fully understand concepts when I go and seek the help of Professionals. And, thanks for all the tips!

David,

I am just now working on this concept, so dont really have a lot to send along. I think if you 'connect' and follow' me from my profile, you will see postings I make..... I'm sure I'll be asking and explaining more as I go :).

I guess what I can tell you right now is that I see Private Lending as my best option going forward until I sell a particular property to free up cash which might be a couple of years. I had read somewhere on here to 'make a list' of all the potential lenders you can think of..... start 'big' and 'narrow down'. Even though I have a list of over 150, Im sure I could add more, but hope I dont ever have to go very deeply into my list because there are certain people that I am sure I would be a bit more comfortable working with, so they will be at the 'top of the list' so to speak.

I do have to say I have been extremely blessed in several ways. I have a large family, and many of them might be in a position to participate. I have had a long a excellent business reputation primarily dealing in construction with upper income people with large asset bases. Many of them have become long term friends also. I have also had the privileged of meeting  and become well acquainted with a group of pretty wealthy folks through an Investment Group locally who I am quite familiar with from having been investing with them for a decade or more.

So in summary, who do you know that might be a good example of similar people?

Take Care, Dan Dietz

David Lee · Answer

@Daniel Dietz

I think that this is a great idea and something that I had not really thought of. Any information that you have that you could email to help me get started like this would be great. I have 4 property's that I rent out and would like more or possibly rent. I run across a lot where I am from but lack the funding. Any help you could give me would be appreciated. thanks David

Bill Gulley · Answer

Dan, those are exactly, exactly the type of folks investor/operators need to be looking for. You are totally on target!

That is also the right approach! Break the ice in the topic, tell what you are doing, how well it's working for you, that more can easily be had but you've hit the investment wall. At that point, I have had people asking how they could get in!

Tips:

Never call their funds an investment, they are "secured funds" or "funds" or "capital" or just plain "money".  If you use the word "investment", so will they, I don't want them talking to others (which they will) saying they made an investment, they "partnered up", "funded a deal". Eventually, they will be speaking to their CPA or attorney! I've had phone calls that began with shooting fire "what is this investment you have my client in" types. All was good after explaining what was going on, you'll avoid these by getting your investor to call it something other than an investment.

Which leads to education, you'll avoid those calls by educating your investor in what they are doing, what they bought, what they earn, profit or interest, how they are secured and in the worst case how they get their money back.

Never put anything in writing as to what potential profits might be, you might talk about it, but stress it's no guarantee or that home-runs don't happen everyday. This keeps you away from making promises you may not be able to keep or implying there will be greater earnings. Not saying don't have stated rates or profit agreements, just be careful showing big deals where you knocked it out of the park.

Always have an exit, people die, estates must be settled. Your deal may say 3 years, but if you have some 82 year old lady wanting her money for her grandchild's issue, I suggest you be able to work out something to get her the money!

Use an LLC and admit them as a member, use the capital contribution and the operating agreement to use the funds, this will keep deeds off the property that can lead to lending issues. Use an attorney! :)

Daniel Dietz · Answer

Thanks for the replies so far guys.

To clarify on a point Bill made about. I AM new to soliciting funds, but have been doing a great deal of research on it also. I fully admit I have a lot to learn :).

I do NOT plan on approaching that many people at once, and maybe I'll never make contact with them all. My list is made up of relatives, people I know from civic activities, past customers, neighbors, people I am involved with in a local Investment Club etc.....

What I DO plan on doing to start is to talk to about 3-5 of them with a dialog not of 'would you like to participate' but more asking them their thoughts on 'here is my plan, I am thinking of seeking people of a similar demographic as you, and would like to know what you think of it: the good, the bad, the questions you would have, etc..." ...........getting feed back if you will to fine tune things.

I may be way off base with the rates and and time frames that think people may be interested in lending at, time will tell.

Just to give a couple examples of the kind of folks I am thinking of;

• An older, retired friend that I recently borrowed the 'fix up funds' (25K) from for a flip I did. I offered 6% for 6 months. He came back with only wanting 3% and I could keep if for up to 3 years if I chose to rent it or it tool a while to sell. I know them well enough to know they have several hundred K in CDs as the 'safe portion' of their portfolio
• A business associate who I dealt with when setting up things for my SDIRA. He had 'heard' of the term SDIRA, but did not know much of anything other than it sounded interesting and he would like to learn more. I had explained how he could do 'loans' from with in a SDIRA, as he has no interest in owning real estate directly, but knows from family experience that it is a good, relatively safe place to invest.
• A former customer that has become a good friend. Middle age couple with high income, no kids to spend it on, and a busy life where they have little interest in pursuing real estate on their own either. Through doing work for them over a number of years and discussing finances for those projects, I know they have a sizable retirement account as well as assets outside of that also.

All of these people are NOT the kind that would like to go out looking for investment opportunities themselves, but I believe might be interested and have just never been presented with such opportunities. I would say they all know that they should be 'diversified' within their portfolios and have enough that if they invested with me it would only be a small portion of their assets. So they  might be what you would say are NOT the typical 'Private Investors' that are out their seeking to find something to invest in.

Hope that all makes sense,

Dan Dietz

Bill Gulley · Answer

I'd say a qualified person will tell you what they want.

Next, going out and making the offer of a rate to 150 people may have two issues, one legally, the other as to your insight into soliciting funds. Putting it in writing is even worse. :)

John Thedford · Answer

I am not sure I like your numbers. In SW Florida 5% or 6% are unheard of. 8% might be found but to my knowledge most private lenders are receiving more. It would depend on your market. If your list of potential lenders finds other willing to pay more they might go elsewhere. I also wonder about the 3 years to 15 years. That is not typical to my knowledge. Check with some local HML guys and see what the market appears to offer. You should expect about the same.

Dan Brewer · Answer

I think your approach makes sense. The general rule of thumb in the private lending industry – where you're using OPM – other people's money, is around 8%. In other words if you can get your capital for 8% or less, that's really pretty good. There are plenty of people out there just as you said – with  substantial assets who would be willing to provide you capital at an attractive rate, as long as you can convince them that your business plan is sound, the asset is of appropriate value, and that you know what you're doing. Good luck!