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.
What's a reasonable return on investment to offer?
- Thread starter iano086
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Thanks!
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.
That's about the size of it. Thanks for the figure.
Fair enough
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.
Steven Barrett
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Companies as big as Lehmans used to underwrite guarantees, look how that ended up.
Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
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).
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).
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
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.
Steven Barrett
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Not at all. They underwrote risk for money. And that is what they were interested in, making money.
"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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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
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)
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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?
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.
That's it.
He's got some more skin in the game that me but that's about right.
Bang on.
12% (and above) did strike me as excessive for a high security investment. And one where no one will be taking anyone to court.
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
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??
That is in my mind. However, the road to self-sufficiency is a longer one without him.
That'd be about it. The rest would be nickel and dime stuff.
Thanks for the sideswipe way of looking at things.
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Indeed, thanks all who have contributed. Like anything new, the whole topic of investment can be a fascinating thing to encounter.
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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