All Forum Posts by: Devin James

@Devin James I'm not currently doing it, but I've for sure toured some properties in my market that I think would make great candidates.  At least in my market I think the older homes that only have 1 bathroom would be challenging to rent in this manor but if you went into with intention and in a high density area I think its a great play. 

@Devin James Another option to consider is to pay the seller a bit more but receive a lengthier settlement period. The ability to settle with permits in hand reduces risk and is a far more efficient process. Some sellers want to sell quickly, but owners of land tend to be more understanding and patient. If presented with a slightly higher offer many will focus on the price over other terms as long as the settlement period isn't too unreasonable. When accounting for carrying time on the bridge debt, taxes and insurance or alternatively over raising equity to take down the land, the costs add up quickly.  Additionally, the ability to schedule the construction loan origination at the same time as the land settlement saves a lot of time not dealing with transactional inefficiencies. 

Not following why you have to raise $330K. If I am understanding this correctly the $175K is the equity amount the lender supplying the construction debt requires so I am guessing this is a roughly $900K total cost project. Assuming interest reserve and contingency funds are capitalized within the loan $250K would be the total equity required to do this deal. How that's split between LP and GP is TBD but for argument sake lets say 80/20, so $50K from GP and $200K from LP.  This should provide sufficient operational reserves and the ability to fund initial construction draws until bank draws are released on work progress. Perhaps even less if the GC can operate without up front fees or just a mobilization fee sized appropriately for this type of project. 

I get what you are saying that hypothetically if you were to buy the land first it would require $330K to take down the land acquisition but it would create a very inefficient capital stack, diminish returns for LP and make the raise more challenging. Plenty of 50-60% leverage loan options for developable land, and may still be more marketable to the LP if you went that route even if it meant incurring some additional finance charges.

Quote from @Devin James:

Quote from @Greg Scott:

It is worth noting that no matter how profits are split, all of these scenarios would likely require the assistance of an SEC attorney to create a PPM.

The example you used was a pre-determined profit.  In reality, at the start of an investment you don't know exactly how the investment will perform. When thinking about how to structure a deal, it is more useful to wargame different scenarios. What if the deal loses money? What if it only makes $10K profit?  What if it makes $200K profit?

Personally, I will never invest in anything with a Preferred Return or Waterfall structure. (I would not offer one as an investment either.) Through wargaming, it is easy to see how the motivations of the operator can become very misaligned from that of the investor when they use a Preferred Return or Waterfall structure.  You don't get that with a fixed percent profit sharing.

I definitely left out a ton of information with the goal of not making this a lengthy post.

But I do question your dislike towards Preferred Returns?

Aside from the misalignment of incentives, this little chart I created shows why I won't invest in deals with preferred returns.

The only thing we know going into the deal is that the returns are projections and projections are always wrong.  They may be high and they may be low.  Most returns will end up in some sort of bell curve like I've displayed below.

Yes, on a middling to poor deal, the passive investor wins out.  With a waterfall return, when a syndicator hits their projection, they are usually getting the majority of the profit.  If they happen to crush it, they get massive returns.  Because I only invest in deals where the syndicator gets a fixed %, I've had passive deals return over 400%.  In a waterfall, that same deal would have given me more like 100% or 150%. 

In the end, my portfolio gives me better returns because I accept the risk of having some deals give me marginal returns to be able to get the massive returns from the home runs.

@Devin James In the $330K scenario you shared are you using debt leverage? $158K gain on a levered project that requires $330k of equity has razor thing margins. Unlevered, completely different story.

It is worth noting that no matter how profits are split, all of these scenarios would likely require the assistance of an SEC attorney to create a PPM.

The example you used was a pre-determined profit.  In reality, at the start of an investment you don't know exactly how the investment will perform. When thinking about how to structure a deal, it is more useful to wargame different scenarios. What if the deal loses money? What if it only makes $10K profit?  What if it makes $200K profit?

Personally, I will never invest in anything with a Preferred Return or Waterfall structure. (I would not offer one as an investment either.) Through wargaming, it is easy to see how the motivations of the operator can become very misaligned from that of the investor when they use a Preferred Return or Waterfall structure.  You don't get that with a fixed percent profit sharing.

@Devin James  I'm straying from the question slightly, but personally if I was able to raise those funds, I would use it as a downpayment and get a loan for the rest.  In the end, the net profit to myself would be higher using a loan versus giving up an equity split, and less complicated.