Advice On Potential Business Direction
Has anyone ever done, or thought of doing, the following?
Myself and a parter were thinking of incorporating and offering a service to wealthy investors. We would basically market our service of guranteeing 12% returns if the project was completed in four months, 13% in five months, 15% in six months, etc.. A property would be bought under their name, using their down payments and the project would be financed using their cash. So for example, a 200k house is bought and rehabbed for 35k...their money into the deal:
1. Down P - 10% 20k
2. Closing C - 6k
3. Rehab C - 35k
4. Holding C - 6k
5. Resale C - 8k
Total Project Costs - 75k
Project Duration - 5 1/2 months
Promised Return - 13% (9.75K)
If the ARV on the property was 290k, you just made yourself 25k for putting up zero capital and using someone else's name for the financing. You could always have several deals going at one time.
The only issue would be finding suitable properties frequently enough that have enough of a spread to make both parties money.
Any thoughts?
NJBay,
you may not know this but what you are describing in part is called a "Private Lending Program". Some of your numbers are off because you have not considered a few things for your program. I have put together one and so if you want to "discuss" this further, please feel free to send me a private message. Here is a list of a few things that I have in my program that you might want to consider embracing - once you do, your numbers and som other elements of your program will make more sense.
-purchased property is no more than 70% - 75% of ARV (this provides a cushion for the investor walking into the deal)
- an insurance policy on my life is part of the deal (protection for the investor in case something happens to me)
-don't tie your rate to performance...because Murphys Law will always kick in when you least expect it. Your rate should be established upfront after you have crunched your numbers. that way you are clear about profit for you and them within reason.
-think about using a 3rd party custodian for the investor so that they get the benefit of whatever rate you are paying and further appreciation of their ROI - tax free!! YEAH BABEEEEE!!
-your idea is heavily weighted in consequences for the investor - where are you in this transaction in terms of risk and rewards. You need to ensure that it is attractive to the investor
-to test your program, you need to do some rehab estimating for practice - this would allow you to see if you are capable of coming close to reality. Find (thru your local rei group) a rehabber that would let you wallk thru a project and estimate the repair cost - then sit down with them to see if you are in the ball park. I have done this and it has tremendous value!. If you can't find a rehabber willing to do this - then walk thru some ugly houses and list repairs - associate a cost and find a contractor that will review your list and validate your cost estimations. I have done this also, again extremely helpful.
In either of these instances if you find your estimates way off then you are not ready to risk someone else's capital. You need to go back to the drawing board and figure out why you are so far off. If you are pretty close then maybe you are ready.
Good luck in your endeavors. Contact me if you want to kick around the "private mortgage" concept some more.
Sure, in theory this could work. Reality may be a bit different. The only way to find out would be to try it.
Your holding costs and selling costs look low given the ARV of the property. Also, you're offering 13% return on cash invested but the investor is also putting up their credit of $180k. Lastly, using your numbers the investor would be into the property for 88% of ARV. That doesn't leave a lot of wiggle room for the "wealthy investor" should the deal go south.
Just be careful how you "guarantee" a return. Depending on what you put into writing the SEC will certainly be willing to review your offering securities!
In other words, this type of scenario usually will work best if you have some people you can just talk with about the project. If you do any advertising, you open yourself up to government review.
NJBay
Your numbers seem to favor the low side. What have you included in your holding cost? Have you included builders risk insurance?
The holding cost and sale cost seem to be vary low.
You want your investors to risk $75k under your control for a 13% return.
Ask yourself: What do the investors need you for?
A bird dog can bring em deals. Anybody can hire handymen. A realtor can sell it.
More likely they're going to want you to handle the $35k rehab. Solve that problem and you'll have a better shot.
NJBay
It could work. However, Most of the wealthy people I know like to get .50 to .68 cents on the dollar for their return. But I don't want to discourage you.
Thanks for the advice! I'm trying to be creative and find ways to have multiple deals going at once, but do not want to get involved in that much work for 3k. I have to revisit the numbers
ligem -
Estimating rehab costs has not been a problem to this point. My partner is well versed in the construction field and has also had his hand in the distribution side for materials, etc. for many years now. If you would like to chat more, i'm on aol at NJBay08
Thanks
Radio52-com
Thanks for your input. That is my thinking....that a 12% return over several months can be repeated into 40-50% returns for the years, which would have anyone jumping for joy in the stock market. An investment backed by land/homes is pretty secure when compared to other options such as.....PFizer