Scenario:
I have investors giving me the capital and I want to make sure I am proposing the standard ROI so not to get screwed.
From reading it appears that most investors in this situation expect 30% before expenses on their return.
Is this correct?
There is no “set” amount of ROI to offer an investor. The more you earn the merrier, for you and him - of course, but you must remember that most people out there are basically financially illiterate. Most people know little to nothing about investing, beyond stock market basics and keeping a checking & savings account. The “average Joe” out there thinks its incredible to earn 6-8% one year in a mutual fund. Anything beyond 10% sounds fishy to most of these average Joes.
So what you should offer an investor, really comes down to who you are talking to.
If your investor is an uncle with a cool $1mm cash in the bank, or even just a couple hundred thousand, and he worked for the government his whole life and has just been a good saver … well you should offer him 6 or 8% and he will probably get super excited. If he wants more, negotiate up from there and simply offer what you can reasonably pay him. Just be careful and don’t offer more than you can — and don’t do your paperwork on a homemade contract — get a lawyer to make it legal.
Someone who is a sophisticated investor would laugh if you offered them 6-8% … and more than likely these investors would not even talk to you unless you had a track record of success using your own money and/or they had little to no risk by having an advantageous position in an investment with a lot of equity … an example of this would be a hard money lender. Hard money lenders charge 12-14% or more + basis points … and again they have almost no risk in the deal IF they do their research and know what they’re doing. Most do.
Hopefully that’s helpful for you.
That is tremedously helpful!! My thought process on this was on track with what you said but I began to have doubts after reading some of the discussions on here.
Thanks for the help!