What is "a reasonable return"?

M

MACTHEKNIFE

Registered User
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Am thinking about putting together a property development project that would require funding to the tune of something like €14-15 million. Have completed smaller scale project successfuly but wondering how much a bank is likely to make available? Ideally I would like to invest around 500k of my own money and would be interested to know how much the bank would offer on top of that eg. 90% loan which would make €5 million available?

If this was plausible I have had some enquiries from friends colleagues who would be interested in getting involved but am wondering what reasonable rate of return would be expected eg. if someone puts up €3 million for such a project over say 15 months is the expected rate of return 10% / 15% / 20%?

This would not be considered a high risk project and would be backed by some decent real estate and hopefully this would be reflected in keeping the expected rate of return to a reasonable level.

Whilst I have a small business set up I am keen to understand what the normal expectations are when bringing in people for extra funding. Any advice would be much appreiciated.

MAC
 
Mac,
Banks generally will fund up to 90% via commercial loan - but it is far from a hard and fast rule. You dont necessarily need to put money in - other security is often used for commercial loans.
In relation to rates of return - you have to think what the average investor would regard as a reasonable return for an essentiall risky venture (way riskier than leaving funds on deposit) If a typical investor can get say 3% on deposit, my rule of thumb would be that the investor would want to make 3-4 times more than that for a property development project, which is percieved to be risky (regarless of how well it is structured)
If you want to aks specifics, which to be fair are probably not of general interest, please feel free to pm me
Munsterdude
A broker
 
Hi Monsterdude,

Thanks for the feedback. Don't think I can PM you though if you are not registered? If this is possible perhaps you can let me know how and I will PM you.

Thanks again
MAC
 
Hi Mac

In the US such private loans would typically return 12-15% per annum. The interests of the investor would be secured through first lien on the real estate. Hard money lenders would look at a max LTV of about 65-70%. Higher LTV and higher risk profiles would usually mean higher rates of interest. I also know of a few individuals in the UK who would pay similar interest rates to investors. In order to reduce the influence of these private investors you could include them on an equity share basis i.e. a reduced interest rate in return for an equity share. There are many ways of structuring such deals and perhaps it is worth finding a good financial and tax advisor who has expertise in this area.

Regards,
Paidi
 
Thanks Paidi for the information. To be honest myself and my partner would be reluctant to provide any equity as we don't want to dilute the partnership arrangement. To offer 15% would not be a major issue as we have just completed a significant pilot project with a gross profit of 40-45% and we now have a opportunity to scale this up which should in fact provide efficiencies on the cost side.

My bank who funded the first project are keen to support further projects but for the scale we would now be looking at, I would think we need to introduce funding of up to an extra €2 million independent of banks on a project that will take c. 2 years to complete.

This is a property development project and as I say we have just completed project in the exact same locality albeit on a smaller basis so we are very familar with both the cost make up and the market we are selling to.

If there's any suggestion as to where to find investors sitting on €500k-€2 million please let me know....

MAC
 
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