# What's a reasonable return on investment to offer?



## iano086 (1 Feb 2016)

I've a (reasonably) proven business going that could scale up notch or two if it got some cash investment. I've also got a businessman friend whose got a 1/4 mil cash he's looking for a return on and he's happy to invest in me (he's done so before in the business to good effect - albeit for a lesser amount).

The essentials I can think of are:

- my being able to offer a guaranteed return: were things not to work out as rosily as planned, my own (approximately the same as his) capital investment amount would take all the hit before the agreed return on his investment be diminished. Assume for the purposes of discussion that it would take an economic meltdown of Armageddon-proportions for this to occur.

- his capital would be locked in for about a year before payout (at which point he could chose to repeat invest). There is a clear enough exit point. He's happy enough with those timescales.​

What kind of returns would other vehicles having this level of security/timescales typically offer? This so that I can suggest a generous but not ludicrously-generous return for his investment in me.

Thanks for any advice / further expansion on my limited knowledge of the area


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## Palerider (1 Feb 2016)

If I read this correctly there would be no security with return of the €250k starting at the end of 12 months.

I have done some private investing such as you outline but never on an unsecured basis, you will not get that money from any traditional lender due to lack of security, if you could you would pay maybe  8%+ with a likely arrangement fee and also cover any legal exps.

Your friend wants to help you, you want to be fair, suggest you work it out between you, rates in the teens could be expected IF you could get it elsewhere privately.


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## iano086 (1 Feb 2016)

Palerider said:


> If I read this correctly there would be no security with return of the €250k starting at the end of 12 months.
> 
> I have done some private investing such as you outline but never on an unsecured basis, you will not get that money from any traditional lender due to lack of security, if you could you would pay maybe  8%+ with a likely arrangement fee and also cover any legal exps.
> 
> Your friend wants to help you, you want to be fair, suggest you work it out between you, rates in the teens could be expected IF you could get it elsewhere privately.




Assume the friends €250K _is_ secured and that the return on his investment (whatever rate it happens to be set at) is also secured.


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## iano086 (2 Feb 2016)

Any investors out there willing to put a figure on the return they'd jump at given the above model? 4% 6% 8% ...??


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## cremeegg (2 Feb 2016)

If the investment was risk free, then 2% would be generous.

But the investment is not risk free. Where would things stand if for example you got sick and were unable to work.

I suggest a reasonable return on the money say 5% plus "secured" as you outlined above, plus some additional % of the extra profit generated by the new investment. Maybe 40% of the profit, until he is paid back


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## Steven Barrett (2 Feb 2016)

iano086 said:


> Assume the friends €250K _is_ secured and that the return on his investment (whatever rate it happens to be set at) is also secured.



Who is providing the security? 

How established is your company and how profitable is it? What is he investing in? What are the risks involved? 

Then look at what he can get. Leave the money on deposit and he gets 1.1%. Invest in established listed, multinationals, he can get a dividend yield of 4% plus the same again in potential growth and less risk of losing his money. 

The higher the risk, the higher the return he should be looking for. If I was investing in one SME, I would be looking for double digit returns on my investment. 


Steven
www.bluewaterfp.ie


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## Palerider (2 Feb 2016)

SBarrett said:


> Who is providing the security?
> 
> The higher the risk, the higher the return he should be looking for. If I was investing in one SME, I would be looking for double digit returns on my investment.
> 
> ...



Totally agree so would I.

Your investor needs to be paid for accepting risk, check with your Bank and see what rate they would apply for lending on a fully secured basis and add a couple of percent to that given nature of the borrowing and variables, BOI will  charge 5.74% secured, ( reference their website ), all that said for me that would not be enough, if your proposal stands then I'm sure a Bank will look at it, they are open for business and you could lengthen the term to suit cashflow.


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## Dr.Debt (2 Feb 2016)

Secured business borrowing from bank costs 6-8%
Investors are currently seeking 10% return on commercial property which is obviously secured on the property itself
Unsecured investment in a small private close company will command a return of at least 15%
Secured investment in a small private close company will command a return of at least 10%

If I was the investor that the Op is referring to and the investment was considered secure, then id be seeking 10%
If the security was extremely reliable and easily liquidated, I may reduce to 8% but not below that. 
Without knowing the details and the nature of the risk and the quality of the security, its hard to give a definitive answer


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## iano086 (2 Feb 2016)

Thanks for the insights..

The situation is thus:

Run-down or otherwise attractive residential property is purchased and flipped. It's been done already a number of times and the pre-tax return on capital input has been approx 50%. The security involved (for my friends capital and his return on capital) is solid in the sense that: in order for them to be impacted, the foreseen 50% return on the project would need to fail to materialize THEN my own capital input would need to be consumed completely. Only then would his return, and after that, his original capital, be negatively impacted.

I understand the property market is a movable feast but his exposure time (where his capital is locked in) is approx 6-9 months* and I don't envisage negative movement of the kind that would enable the above security to be breached. Even the most recent crash didn't see property fall overnight to that degree.

* I said above that he would be locked in for a year. Better said, I'd be starting the clock now on the duration for which I'd be paying a return but wouldn't draw down his capital until the next property needed closing on. That'd be some months down the road.


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## cremeegg (2 Feb 2016)

So your €250k plus his €250k means you have €500k to spend.

When it comes time to sell and things didn't work out and you have to sell for €400k. He gets back €260k, his investment plus a return, and you get back €140k. 

That will never happen. Unless you are a saint you will want to try to regain the money and he will want to walk away.

He would be mad to get involved on any basis except 50:50. with maybe you getting an extra €5k from the sale for your time

As a business plan this is not low risk


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## Dr.Debt (2 Feb 2016)

There are lots of amateur investors out there and each of them will price the risk differently. Have you asked your friend what return he requires ? Is the profit taxed as capital gains tax or income tax in your particular case. Does the investor get a 1st charge over the property that is being purchased ?

From what you describe, and with my investment secured on the property and with a good legal agreement in place, Id be happy with around 12% net of tax.


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## iano086 (2 Feb 2016)

cremeegg said:


> So your €250k plus his €250k means you have €500k to spend.
> 
> When it comes time to sell and things didn't work out and you have to sell for €400k...



..and for €400K I do sell. I go drown my sorrows and, after nursing the hangover, head around to his place with a cheque for €250K plus X (where X is whatever ROI was figured appropriate for a well-secured investment).




> That will never happen. Unless you are a saint you will want to try to regain the money and he will want to walk away.



I'm less saint and more friend. I'd have absolutely no problem ensuring his investment in me (and I stress, it's in me) is paid back as agreed - right up to the point where all my capital is gobbled up.





> He would be mad to get involved on any basis except 50:50. with maybe you getting an extra €5k from the sale for your time
> 
> As a business plan this is not low risk



There's a little bit more involved in turning around properties than €5K could cover. 

Does your assessment of risk rest on what you think I would do in the face of diminishing project return / own capital being eaten into. Or in the actual proposal itself? If sticking to the latter and working on the premise of the indicated level of security/buffer before his capital / ROI is impacted, what kind of ROI would you be suggesting?


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## cremeegg (2 Feb 2016)

iano086 said:


> There's a little bit more involved in turning around properties than €5K could cover.



Thats probably true. You should agree a figure at the outset.



iano086 said:


> Does your assessment of risk rest on what you think I would do in the face of diminishing project return / own capital being eaten into. Or in the actual proposal itself?



On the actual proposal itself.



iano086 said:


> If sticking to the latter and working on the premise of the indicated level of security/buffer before his capital / ROI is impacted, what kind of ROI would you be suggesting?



50% of the profit

€250k contributed each. Sell for €600k. Thats €10k for you for your time (or what ever figure you both agree in advance) and €590k split equally between you.

And if its a loss you both share that also. Just my suggestion. Its not fair on him if he doesn't get some of the upside. After all with the above figures if you gave him 10% of his investment that would be €275K for him and €325 for you, hardly fair.


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## iano086 (2 Feb 2016)

Dr.Debt said:


> There are lots of amateur investors out there and each of them will price the risk differently. Have you asked your friend what return he requires ?



He's easy enough going on things - he wants to give a dig out but also wants to get his money working. He'd be happy with whatever but I'm trying to ensure the thing is done somewhat on the basis of typical amounts vs. risk profile. I don't want to take advantage of his largesse nor do I want to overcook the return. This may well be a precursor to others investing so I need to orientate myself.

I suppose I'm looking to see what would be a non-amateur approach be given the assumption of very little risk. That is: forget about the merits of my own case and just look at what are typical returns expected for a very low risk investment with lock-in for 9 months to a year.




> Is the profit taxed as capital gains tax or income tax in your particular case.



Some income taken by me (more at the start and diminishing as a % of each project as projects start overlapping - the project duration is long but I'm active only for a portion of it, say 33% of that duration). Profits (after deducting his roi) going into increasing capital for the next project. 




> Does the investor get a 1st charge over the property that is being purchased ?



We hadn't discussed the arrangement on that but would do that or some other way of ensuring his first call. We trust each other implicitly but would formalize things just in case of God knows what. In the case of my death, my wife could do a runner..



> From what you describe, and with my investment secured on the property and with a good legal agreement in place, Id be happy with around 12% net of tax.



Thanks for putting a number on it. Does anything I've said above alter that?


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## Gordon Gekko (2 Feb 2016)

Development finance is typically in the 14% to 20% range...that's what investors typically look for.


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## iano086 (2 Feb 2016)

cremeegg said:


> And if its a loss you both share that also.



The loss side of things isn't really on his investment horizon. He's looking for something pretty ironclad. And given the buffers involved between him and loss, that is what I can offer him.




> Its not fair on him if he doesn't get some of the upside. After all with the above figures if you gave him 10% of his investment that would be €275K for him and €325 for you, hardly fair.



The fairness comes, I suppose, from how the profit is generated. Assuming it is generated, then it will rest on my/his capital inputs and on my knowledge/skill/work/taste that produces the profitable result. Since I'm not sure how to put a value on that latter element (how does one price wealth creation ability other than by the amount of wealth it creates?) I'm finding it difficult to see past other than giving an investor a return on his investment based on the risk profile/timescales involved. He would have no part to play other than his investment.


By the way: in putting together a model for return on his investment, I have already included a profit share element since the sale price of a property can fluctuate quite a bit from that projected (leaving aside fluctuations due to general market movement). As we do better than expected, that element of his increases in windfall fashion.  But it was some general guidance on a low risk return I was looking for.


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## iano086 (2 Feb 2016)

Gordon Gekko said:


> Development finance is typically in the 14% to 20% range...that's what investors typically look for.



Thanks. Good name that...

Would it have a similar risk profile (let's assume the one I'm involved in is all but Armageddon-proof: capital and return on investment is guaranteed) and timescale involved?

Aside from security and lock in period, are the other elements an investor would consider?


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## iano086 (2 Feb 2016)

It's time for me to go to market, so, Dragons, your best and final offers would be appreciated 

- assume a 100% secured (financially and legally - on both your capital and the return agreed at the outset) investment. Although relatively illiquid, the project property can be knocked down in price at any stage in it's development up to the lock in period to ensure a secured exit for the investor (in the event of my death, financial market crash, etc)

- a 9 month lock in period - assuming no need for a forced sale.

- assume a straightforward return on investment. There is a windfall element involved but I'll take account of that likelihood in my offering a fixed % return on capital

Thanks for all the inputs - it's been illuminating!


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## Dr.Debt (2 Feb 2016)

12%


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## Steven Barrett (2 Feb 2016)

I always get nervous when someone tells me it's "guaranteed", especially when it comes to investing. Makes me want to run for the hills. 

If I was lending you money, I would want security on the property, first in the queue so if it all goes south, I have first dibs on the proceeds of the property. I'd still look for double digit returns, say 10%. I would have a time frame on those returns too and the longer you go over the time frame, the higher the return. 

If your partner wants a share in the profits, then he has to share in the risk, so I'd take away the security on the property. You are doing the work, but nothing happens without his money. Give him 30% - 40% of profits, no security or timeframe.

Risk and return...


Steven
www.bluewaterfp.ie


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## 44brendan (2 Feb 2016)

SBarrett said:


> If your partner wants a share in the profits, then he has to share in the risk, so I'd take away the security on the property. You are doing the work, but nothing happens without his money. Give him 30% - 40% of profits, no security or timeframe.


Totally agree. Alternative option proposed by doesn't make sense. This needs to be done as a business partnership with a proper agreement drawn up by a solicitor. Offering your friend a risk free return of his capital plus his investment is not fair on either of you. If you have experience in these type of deals and have a good eye for the property market then sit down with him and discuss the positives and negatives. I.e. as per earlier suggestions return for him should be 50% of the profits after taking a reasonable defined amount for your labour/etc.


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## iano086 (2 Feb 2016)

Dr.Debt said:


> 12%


Thanks!


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## iano086 (2 Feb 2016)

SBarrett said:


> I always get nervous when someone tells me it's "guaranteed", especially when it comes to investing. Makes me want to run for the hills.



I'd have thought it would make you run for your wallet. I plan on spending eternity with this friend up above so no chance of him being screwed over.



> If I was lending you money, I would want security on the property, first in the queue so if it all goes south, I have first dibs on the proceeds of the property. I'd still look for double digit returns, say 10%. I would have a time frame on those returns too and the longer you go over the time frame, the higher the return.



That's about the size of it. Thanks for the figure.



> If your partner wants a share in the profits, then he has to share in the risk, so I'd take away the security on the property. You are doing the work, but nothing happens without his money. Give him 30% - 40% of profits, no security or timeframe.
> 
> Risk and return...



Fair enough


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## iano086 (2 Feb 2016)

44brendan said:


> Totally agree. Alternative option proposed by doesn't make sense. This needs to be done as a business partnership with a proper agreement drawn up by a solicitor. Offering your friend a risk free return of his capital plus his investment is not fair on either of you. If you have experience in these type of deals and have a good eye for the property market then sit down with him and discuss the positives and negatives. I.e. as per earlier suggestions return for him should be 50% of the profits after taking a reasonable defined amount for your labour/etc.



I'll put it to him that way. And will let yous all know the result. Who knows, I might tap into the next round of investors on here. Whilst things have gone well thus far, the benefits will come with a rolling cycle of properties overlapping - rather than one at a time strung end to end. Trouble is, it's capital and intensive.


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## Steven Barrett (2 Feb 2016)

iano086 said:


> I'd have thought it would make you run for your wallet. I plan on spending eternity with this friend up above so no chance of him being screwed over.



Companies as big as Lehmans used to underwrite guarantees, look how that ended up. 


Steven
www.bluewaterfp.ie


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## Andy836 (2 Feb 2016)

Let me get this straight,
Am I approximately right in the following:

You buy properties, do them up and sell them.

Your funding model is $250k from your buddy (Mr X) and $250k from yourself.
So you buy a property for about $425k and put $75k into renovations and seek to sell for $500k+.

The ranking of net proceeds from the sale is as follows:
Mr X gets back his $250k,
Mr X gets back a TBD ROE
You get your capital back.
You get your return on capital.

If this is legally documented then the return figures being quoted here are mad.
You're giving Mr. X priority ranking on a fixed asset with, from his perspective, an LTV of 50%.
You shouldn't be considering giving him any return over 5% p.a. - which is commensurate with current BTL rates from BOI/AIB up to 70% LTV.

If he wants to juice his return, and really believes in you, you could offer him 50/50 participation whereby you split 50% of the profits AND 50% of the losses.
Remember, all he's doing is chucking $250k into a property, you're the one (i) finding the property, (ii) negotiating the purchase, (iii) doing it up, and (iv) selling it.

You seem to be offering him a very very good deal. However, that's all dependent on how you do this. Do you do it through a company with no other creditors? If not, and you don't give him a lien on the property you buy (which I assume does into your name) then he ranks as an unsecured creditor along side all your other unsecured creditors (bank overdraft, alimony, credit cards etc*)

*not saying you have any of these but if it went pear shaped he could come up against something like those when he sued you on foot of his investment (loan).


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## iano086 (2 Feb 2016)

SBarrett said:


> Companies as big as Lehmans used to underwrite guarantees, look how that ended up.



Lehmans don't strike me as an entity which would prize honour and friendship above money. 

Since there ample buffer money involved so as to guarantee my friends input against all but Armageddon-esque events (Lehmans and subsequent events don't qualify as such - at least, not in so far as they impacted on Irish property prices) I don't quite understand the substance of the security-objection aspect of the discussion


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## iano086 (3 Feb 2016)

SBarrett said:


> Companies as big as Lehmans used to underwrite guarantees, look how that ended up.



Lehmans don't strike me as an entity which would prize honour and friendship above money.


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## Steven Barrett (3 Feb 2016)

iano086 said:


> Lehmans don't strike me as an entity which would prize honour and friendship above money.


 Not at all. They underwrote risk for money. And that is what they were interested in, making money.


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## Cervelo (3 Feb 2016)

iano086 said:


> Lehmans don't strike me as an entity which would prize honour and friendship above money.
> 
> Since there ample buffer money involved so as to guarantee my friends input against all but Armageddon-esque events (Lehmans and subsequent events don't qualify as such - at least, not in so far as they impacted on Irish property prices) I don't quite understand the substance of the security-objection aspect of the discussion



"I'd have thought it would make you run for your wallet. I plan on spending eternity with this friend up above so no chance of him being screwed over."

I find the above quotes worrying, I can understand you want to make your proposition more attractive to you friend but to me you seem to be putting more emphasis on your friendship and his investment and his guaranteed return.

Looking at it through your eyes I would see it two ways
1. Your friend as a sleeping partner loans you the 250k in return you make him a secured creditor on the property and in return for his secured loan you pay interest
so at the end of the project you pay him his loan back plus the agreed interest and you keep the rest.
2. He invests his 250k with your 250k and becomes a 50/50 partner in your project, at the end of the project you split the net profits 50/50.

I know it not as simple as the two above examples but I see it as he either lends you the money or invests his money in you.


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## iano086 (3 Feb 2016)

Cervelo said:


> I find the above quotes worrying, I can understand you want to make your proposition more attractive to you friend but to me you seem to be putting more emphasis on your friendship and his investment and his guaranteed return.




Thanks for responding....

I've been trying to emphasis (for the purposes of getting views on an appropriate roi) the level of security on offer for my friend the investor. Since the trust is absolute and there is plenty of buffer money protecting his capital and return he has a level of security that can be considered in a particular way. Call it gilt edge, call it safe as houses, call it whatever investors call high level security. If a very high level of security is offered what then a reasonable return




> Looking at it through your eyes I would see it two ways
> 1. Your friend as a sleeping partner loans you the 250k in return you make him a secured creditor on the property and in return for his secured loan you pay interest



What rate would you suggest given the security level




> 2. He invests his 250k with your 250k and becomes a 50/50 partner in your project, at the end of the project you split the net profits 50/50.



The chances of loss are relatively slight compared to the chances of gain so I'd stick with the first option with perhaps some profit share in the case of windfall levels of profit (if going this route, I'd trim the plain roi element)


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## iano086 (3 Feb 2016)

SBarrett said:


> Not at all. They underwrote risk for money. And that is what they were interested in, making money.



And my primary concern is not making money but ensuring the safety of the money that a friend would invest in me. If Lehman's employees had that concern (concern for the well being of their company and in the wider interest), do you suppose they would have gone they way they went? Was it not the case that Lehman employees were engaged in risky practices, guaranteeing that which had no right to be guaranteed? In order to make money for themselves? A kind of unsafe sex of the investment world?


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## PMU (3 Feb 2016)

If you are offering a guaranteed return you are not taking an investment; instead you are issuing a zero coupon bond with a duration of 1 year.  Don't offer him a return of X%. Instead ask him what he will give you now to get 250k guaranteed back in a year's time. Then work out the return required on what he offers to pay out the 250k. If you think your project can match or exceed this return take his money. Otherwise look for a deeper discount on your bond.


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## iano086 (3 Feb 2016)

PMU said:


> If you are offering a guaranteed return you are not taking an investment; instead you are issuing a zero coupon bond with a duration of 1 year.  Don't offer him a return of X%. Instead ask him what he will give you now to get 250k guaranteed back in a year's time. Then work out the return required on what he offers to pay out the 250k. If you think your project can match or exceed this return take his money. Otherwise look for a deeper discount on your bond.



Although I'm sure there are different ways to describe our arrangement, it ultimately boils down to him asking for an amount/me offering an amount to reward him giving me money for a year. This, with a particular (very low, let's assume for the sake of discussion) risk profile for either of us.

Since he'd likely ask for far less than professional investor rates and I'd like to offer near/at/above professional investor rates (depending on what those are and what I'm confident I think I can achieve with the money) it'll be me offering rather than him asking.

In order to figure out what to offer, I'd welcome comment on what a professional investor would be looking so as to gauge my offer.


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## iano086 (4 Feb 2016)

Andy836 said:


> Let me get this straight,
> Am I approximately right in the following:
> 
> You buy properties, do them up and sell them.



That's it.



> Your funding model is $250k from your buddy (Mr X) and $250k from yourself.
> So you buy a property for about $425k and put $75k into renovations and seek to sell for $500k+.



He's got some more skin in the game that me but that's about right.




> The ranking of net proceeds from the sale is as follows:
> Mr X gets back his $250k,
> Mr X gets back a TBD ROE
> You get your capital back.
> You get your return on capital.



Bang on.



> If this is legally documented then the return figures being quoted here are mad.



12% (and above) did strike me as excessive for a high security investment. And one where no one will be taking anyone to court.




> You're giving Mr. X priority ranking on a fixed asset with, from his perspective, an LTV of 50%.
> You shouldn't be considering giving him any return over 5% p.a. - which is commensurate with current BTL rates from BOI/AIB up to 70% LTV.



That's an interesting way to view it (- especially in light of the difficulty Irish banks have invoking their priority ranking on fixed assets like residential property when things go pear shaped. I'm sure they take that aspect into account with their 5% rates).

The question though, is whether someone can get better rates than 5% whilst obtaining similar security as the banks do in lending against fixed assets. Those would be the rates to be citing to my friend rather than the lower ones on the spectrum




> If he wants to juice his return, and really believes in you, you could offer him 50/50 participation whereby you split 50% of the profits AND 50% of the losses.



A profit share element is part of what I'm proposing, but not 50/50 as a) the low risk element is important to him b) the margins are such as to make losses a distant prospect. Perhaps not the gain you want, but losses??



> Remember, all he's doing is chucking $250k into a property, you're the one (i) finding the property, (ii) negotiating the purchase, (iii) doing it up, and (iv) selling it.



That is in my mind. However, the road to self-sufficiency is a longer one without him. 



> You seem to be offering him a very very good deal. However, that's all dependent on how you do this. Do you do it through a company with no other creditors?



That'd be about it. The rest would be nickel and dime stuff.

Thanks for the sideswipe way of looking at things.


-

Indeed, thanks all who have contributed. Like anything new, the whole topic of investment can be a fascinating thing to encounter.


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## Cervelo (4 Feb 2016)

iano086 said:


> What rate would you suggest given the security level
> 
> 
> The chances of loss are relatively slight compared to the chances of gain so I'd stick with the first option with perhaps some profit share in the case of windfall levels of profit (if going this route, I'd trim the plain roi element)



I'd say given the level of security, lets just take it that there is zero chance of your friend loosing his money, the return to him should be low.
I'm not an investor of this type but I'm sure those investors would be looking at a return rate in the double figures even up to 25%
For me if I was in your shoes I ask him what return he wants first, just like if you were down at a bank but I would be thinking in and around the 5% mark
the idea of some sort of profit share at the end should in my opinion be looked at only if he takes the investor route with a level of risk to his investment.

The way I see it he probably wont get a high return on his money if he invests it somewhere else and he would be taking a risk with his capital.
Remember he is an investor and has been an investor in your past projects and seems to want to do so again, so he sees you as a good low risk investment.


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