I approached a friend and asked if he would be interested in earning 12% on money he might invest witih me. He thought that was a good deal and was interested.
I told him it would be minimal risk on his part as he would get the house as the worst case scenario. His response was if he gets the house, what if the house doesn’t sell?"
My question is…How do I present this to private lenders (friends) so they feel that there will be minimal risk on their end? Because I may be starting small, possibly having several $10,000 lenders, how do I explain to them the worst case scenario?
Yes, I’m very new at this and would appreciate any insight you could share.
First, I would look at doing an action plan, and review all scenarios possible with investing in real estate.
Do you have a Plan B, C, D, etc., ready in case your Plan A fails? Private lenders need to know what will happen, in writing, what your next step is.
Set up an LLC or corporation. This is maybe the number 1, relatively easy way to minimize risk. Your investors will invest in the LLC or corporation, thus, only the money invested is at risk. Plus, the legal buffer is added, in case a lawsuit is brought against the company.
Make sure all agreements are in writing. A handshake, especially with friends, is never a good business practice.
I’m not sure how to develop these different plans. How might someone just starting in REI develop these?
You only need one action plan to encompass all different scenarios. I know as a new investor, it is difficult to imagine all possible problems.
Your friend asked, “what if the house does not sell?”
How are you acquiring the property? How are you going to market the property (i.e. agent, FSBO)? What selling option will you use (i.e. lease-option, retail sale, etc.)?
Each question has its own “what if” portion. For each question here, if the first plan does not work, what is the next plan of action?
In forming an LLC or corporation, check with your state’s corporation commission. They have the forms, information and can answer questions regarding the formation of these types of companies.