No money down - Compensating multiple investors

Hello,

I’m a newbie to REI and initially plan on flipping properties until I get some experience and cash reserves. However, I have come across a couple of multi-unit rental properties that appear (on paper at least) to be a good deal. I would still have to crunch the numbers and look at the other factors that will determine whether this is a good deal or not. In any event, before looking at this particular deal any further I want to figure out how I can take advantage of opportunities like this with no money down (and assuming that I can’t get owner financing).

I have a friend who has expressed a casual desire to get into REI. My friend is a HVAC contractor and has TONS of contacts in the industry as well as a bunch of contacts with lots of money looking to invest it. In fact, my friend has stated that as far as REI is concerned, financing would never be a problem. This is my question:

How can I structure a deal that does the following:

1.Compensate me for finding the property (ideally, I’d like to own one of the units and perhaps manager the property – at least for one of them)
2.Compensate my friend for finding the financing (I would need to give him an incentive to continue doing this and I’m not sure that a flat finders fee would suffice)
3.Compensate the investor for putting up the cash

Thank you in advance for any help.

prez,

That’s why they call it “networking”…it looks like a large spiderweb that reaches out across various specialties and acquaintances…looks like you’re on the right track with that!

As for your questions:

1. Compensate me for finding the property (ideally, I’d like to own one of the units and perhaps manager the property – at least for one of them)

As long as it cashflows, buy and hold! You will be compensated by an income stream, capital appreciation, and tax advantages.

2. Compensate my friend for finding the financing (I would need to give him an incentive to continue doing this and I’m not sure that a flat finders fee would suffice)

Offer him a flat fee (like $500) and an ownership stake in the house (like 10-20%) or a percentage of the annual Net Income.

3. Compensate the investor for putting up the cash

He is compensated by the agreed upon interest rate that he will be receiving from you.

Remember – it’s business…if you give it all away, you’ll have a problem accomplishing item #1…but don’t “cut off your nose to spite your face” and not compensate them enough such that they won’t bring you more…

My 2 cents…

Keith

here’s my opinion based upon being involved with setting up financing for start-up/small companies for a few years as well as doing REI for 8 yrs.

there needs to be only two people at the “equity” or “profit” table:1) investors who have cash in the game 2) people actually doing the work. These are both groups of people who have “skin-in-the-game” and thus have risk that should be rewarded with profits and/or losses.

I have heard all the arguements about how people who are “enablers” should be compensated as well. At best, you should throw them some cash ($1000), but if you start down the path of including every Tom, Dick and Harry who give you a phone number, you will have little or no profit for those who have taken on the biggest risk in the deal.

As another benchmark, there are private individual and small groups that do investment fundraising and a somewhat standard commission on money raised is 6%.

So if you feel like you really need to include your coontractor buddy in the deal I would offer him 5% (at best), but he has to do more than pull a phone number out his dayplanner. In fact I might even require some token amt of money to be invested, just to get his interested aligned with other players.

One final thought. I have run into a lot of people who tell you about all their “rich friends” and make statements like “they got plenty of money to invest”, but my experience it getting to talk to them is just 5% of the journey. You will need to spent a huge amt of time with the investor to set-up teh investments terms. Usually you will have to give up more of the pie to them than you initially planned on and thus why if you start giving out “equity pie” to your enablers, you will quickly find out you have run out of “profit pie”.

People who have lots of money did not get it by being “nice guys” at the bargining table.

Some thoughts on the matter.