What is a typical deal structure with outside investors?

Question

I've been listening to the BP podcast and a lot of the investors they interview talk about getting outside investors and using other people's money. I'm just curious how these deals typically are structured. Where do I, the person finding deals, benefit.

For simplicity sake let's say I finance a duplex using money from two investors (50/50) and none of my own money.  Would I just collect an annual fee or would I take a % of equity?

Chris Seveney · Answer

@Trevor J Dammon

Typically as the sponsor you collect a small fee (1-3%) for management and take 20% of profits at exit

That is a traditional waterfall but can be structured many different ways including a preferred return to investors.

John Teachout · Answer

With this type of "partnership" situation, everyone needs to bring something to the table. What would you be bringing if they're bringing the money?

Nicholas L. · Answer

@Trevor J Dammon

I think what you're missing is the value add aspect.

Simple example: you could BRRRR a single family home by purchasing with borrowed private money. You pay the investors interest during the rehab portion, then refinance into a conventional or DSCR loan, and pay the investors back, paying the private loan off.

You now own a house, and the investors got a good return on their money.

That's just a simple example - as others stated there are tons of ways to do it.  But my point is there's usually a value add component.

Jim Dealut · Answer

Also in your example of buying a duplex and having 2 investors each put up 50%. You are going to be very hard pressed to find any investor willing to do that.. Unless you are getting the property 30-50% under market and the property is throwing off a rental return after expenses over 10%.

You are better off just working with a lender if you have the income and credit.

or a hard money lender if you only have found a great deal on a property and don't have credit and income to get a traditional loan.

Jim Dealut · Answer

It depends on what you are bringing to the table.. When I used investors I was flipping properties.

They would put up all the $ for the purchase and rehab.. I would find the properties under market, handle the whole renovation. resell the property not charging a Real estate commission as the listing agent. Then they would get all their money back and the profits would be split 50/50..  This is pretty common setup..  I would also guarantee them a 10% return on anything we did together.. Meaning the deal had to produce a 20% return for us both to get 10% each.  IF the deal only produced a 15% return they would get their 10% and I would get 5%.

If you are just looking at buying a property at retail prices and managing the leasing of the property you are not bringing anything to the table that a property management company would bring..  You will have a VERY hard time find anyone to invest in that situation.   Most investors need to earn 8-10% on their money after all expenses and have a reasonably "Safe" position in the deal securing their capital.

Trevor J Dammon · Answer

@Jim Pellerin, thanks for replying. The situation I listed is purely hypothetical. I have heard people on the BP podcast talk about taking investors and I am just trying to get a sense for what those deals look like.

What is a typical deal structure with outside investors?

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