Finding private money to invest in RE
 

Looking for advice on securing private money for my investments. Ideally, I'd like to find a retirees or individuals who have money invested in fixed securities who would like a chance to earn a better return secured by distressed RE.

The foreclosure market has gotten to the point the returns are too juicy to pass up. However, I have committed so much personal capital in various projects that I cannot finance many new deals. I'd like to find the proverbial little old lady making 1.5% in a bond fund, offer her 4% and create a win-win situation.

I know I can make it work.

Any advice appreciated.

Is this a marketing question or a legal/securitization question?

I've thought about the same thing, although my location makes it more difficult. In terms of the mechanics of the deal, Its probably simplest to use an investment partnership of some sort. For marketing, perhaps seminars of some sort?

Taking a step back for a moment, I think you need to rethink your target market. Widows and orphans are invested in "safe" securities for a reason: they depend on the money. Ignoring the investment merit of the idea, I think we could at least agree that the higher potential return also brings a higher risk.

Madoff....

Respectfully, your 4% isn't even close. There are firms out here doing second mortgages, buying foreclosures, etc... You'll need to double your return. At least.

By anyone's calculations, distressed RE is a high risk investment. Returns should reflect that.

+1

I was thinking I'd expect at least 7%-8% to put any money into a venture like that. Minimum. And I'd want a lot of specifics in the prospectus.

RE is still really, really volatile (goes for residential and commercial in virtually all markets).

I'm writing a prospectus for private investment for 'floorplan' of the automobiles I inventory as I expand. Cars as secured collateral are quickly liquid, have unique VINs, and aren't nearly as volatile. I'm offering 8-12% simple interest paid monthly (.67-1.0% per month). So I don't think 4% will cut it.

You'd be better off trying to sell it to younger people who want to get a better return and have time to recover if your enterprise is less than successful. Retirees and little old ladies settle for low returns because the risk is low. If they want more risk/reward they already know where to get it, but they don't.

I'm looking for advice on all aspects: legal and marketing.

The properties I do are single family residences purchased as foreclosures, then rehabbed and rented. Right now, asking prices are below build cost. I can't build the houses for anything approaching the selling prices, and that's assuming land cost is $0. In other words, prices are at or below prices 10 years ago. My proposal, when I find a sucker is taking a cash investment at say 70 cents on the dollar. I invest the other 30% along with the sweat and materials to bring it back to excellent condition. Then, grandma has as least 40% equity position in secured RE that will eventually grow in value (we are talking about real estate in flyover land). RE is held long-term.

The ideal scenario is networking with friends and family, because I need to be able to describe my plan and show I'm trustworthy and honest.

My mistake seems to be in believing that I can get money for 5% or less. I guess I need to be a crook or a bank on Wall St to get cheap money. If I have to pay 8-12%, forget it. I'll just use what little money I have left. If I can leverage that money (70% other money vs 40% my own), then I can do a lot more deals.

The bank I use is big and they don't want to take on any risk. I need to get with a small bank, but building that relationship takes time. So does building a relationship with grandma.

Yes, PoP, I expect full disclosure of every aspect of my life (personal and financial) to do business with individuals.

wd, I need investments of at least $50k to get into one property. I don't know of many younger folks carrying that sort of cash.

To me, buying RE at or near the bottom--RE in growing, vibrant communities-- RE that is in demand by growing families is a great investment. That's why I think 4-5% is a good return. It's a slam dunk for me. I have to convince others it is a great investment.

The other alternative is buying the distressed property with my own money, doing the rehab and getting it rented. Then, grandma gets a mortgage and deed to a sparkling clean house, and I get 70% of my money back.

"...position in secured RE that will eventually grow in value "

So, you want granny to invest (risk) in a long-term (risk-filled) pay-out?

From what I know of you, you are not the dishonest guy you sound like right there.

As someone who lives off his investments, I would expect more than a 4% return on loaning money on a rent house. Is grandma basically going to be your banker, or is she also actually getting equity in the deal. Cant you use the equity in the other projects to finance the new ones?

I agree that your best bet would be with starting out with your family. I would loan my kids money at 4% if I thought that it would help them out and I thought that the deal would work out. But I know them and in the end they are going to end up with my money anyway.

I'm not sure what you are proposing. Are you looking for lenders, or equity participants?

From your first post, it sounded like lenders. You are looking for people lend you $$ at 4%, which loan would be secured by real property.

If that is the case, I agree with the others. The only grandma you'd find to stroke you a big check for the promise of that small return, and no chance of any upside, would be your own. There are so many problems with that. One would be that people's money would be illiquid for a long (at least many, many years, maybe decades, and perhaps indeterminate) amount of time. Not many would want to jump on that train for the promise of 4%, and no chance of any other upside (and uncertainty as to interest rates 5, 10 or 15+ years from now).

But your above post makes it sound like the investor has an "equity position" in the property. That, of course, is a very different scenario.

Buying non-inflation protected 30 year treasury bonds is risky, but lots of folks do it. The primary difference is that I don't have access to a printing press. ;)

I see what you guys are saying. My perceptions are unrealistic. I know real estate inside and out. I'd rather have MY money in something I control, generating a stable return. That's me. Conversely, I'm expecting granny, who knows nothing about real estate to buy into my idea. I can see where she needs a high return, and all I can say is good luck to that. I'd buy a property for $95k, invest another $5k and 3 weeks worth of labor. That property would show a cap rate/return of around 11%. Then, I'm supposed to not only invest $30k of my own money, but also pay granny 8-12% for her money. I can quickly see I am not investing, but working for someone else. ;)

Oh, well, back to the drawing board. :D

There's the flaw in your argument.
There is a joke about Grandma not buying green bananas because she may be gone before they are ripe. There aren't many circumstances where a retired person is going to be looking at long term investments. As you get older your time horizon gets closer and you look at investments that are stable and easily liquidated.

If I had to offer grandma an equity position, that'd be fine, but I was more interested in a lender in first position (no seconds or other encumbrances on the property).

My parents have bucks just sitting in a savings account making damn near nothing. I'd pay them whatever they want, but they don't want any interest. I feel bad. I pay them back with labor, assistance, and everyday help, but I still feel guilty. I'd rather just pay an investor a set interest rate and keep it arms-length more or less.

IOW, if I had to offer an investor a percentage of the upside, I would consider it. They'd have to be silent partners.

I thought offering long amortization terms would be advantageous to grandma, so she isn't concerned about getting a pre-paid loan back and having to find another scam artist. Really doesn't bother me whether the loan term is 15 years or a 3 or 5 year balloon.

Many thanks to the responses. This definitely helps.

Maybe you're working a little too close. People I know are buying behind cost of build by a factor of half and the land is free. Problem is, if they were worth selling, they'd be sold.

So renting is the model. To get a good return at rental rates, you can't really afford to be working on borrowed money.

You'd be better off taking a commission for setting up these deals. And, you can make a little off the repairs. Plus you could become a property management company. The tax advantages go to the client which is a good sales tool rather than trying to hold title to all of the properties yourself.

Over time, you could pick off a few for yourself. I'm sure you will attract investors as you go about expanding the inventory if you do a good job for your clients.



That's how it works in CA these days.

That's good advice Milt

This is excellent advise RE investing has never been a Grandma type of play,it lacks liquidly to cash her out. Reits have the cash on hand, the little guys don't.

Smart RE investors like 7% + returns. Look for middle age investors with high discretionary incomes.
MD (Docs) investment groups are a good start they like higher returns than 7%

It's tough out there right now, don't ask how I know.

Tough for the investors or the little guys trying to get new money?

milt, the suggestion of being a 'broker' or sorts would work. I've considered it many times, but then I worry about the extra work, responsibility, and keeping clients happy. I would certainly not mind passing on extra deductions to investors. Right now, I have so many deductions that my income, on paper, looks quite meek. That looks weak to the bankers, so money isn't easy. I'm faced with either finding money from individuals, or simply keeping things clean until I can swing a new deal once every couple years.

Goal is to buy 3 or 4 more properties and eventually own them free-and-clear. Then, transition to semi-retirement.

Plenty of food in this thread to keep my brain fed for a while. Gonna think long and hard, because I have plenty of time.

Better rethink the plan...
 

I have competition.

Calculated Risk: Homebuilder to Buy Distressed Homes and Rent Them