Thoughts On My 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?
Sounds like a great way to lose money.
I just don't think there is a large enough spread involved in flipping (in most markets) to make good money for two parties. In your example, your numbers seem too simplistic and optimistic. You aren't factoring the amount the carrying costs for the amount of time the property may sit on the market waiting to be sold. Also, only 8k for resale costs on a 290k house? Either you are in a hot market where a FSBO can just pound a sign in the yard and watch while the offers come pouring in or Realtors and Mortgage lenders work real cheap in your area.
In addition to the difficulty of finding suitable rehab prospects that adhere to the 70% rule, one of the biggest costs associated with flipping IMO is that painfully expensive selling commission. Even if you take the FSBO route you will almost surely pay 3% commission when a realtor you've never met presents you with a buyer. But count on a FSBO to sit on the market much longer. Realtors aren't too interested in showing your property without a listing agreement.
Given your example, here's how I see the numbers based on a 200k purchase price, 6mo rehab, 3mos on the market, 6% realtor's fee and 1.5% sellers closing costs. PITI is ~$1600/mo.
Purchase Price $200,000
Buyers Closing costs $6,000
Carrying costs $14,400
Rehab $35,000
Sedlling costs $21,750
Total costs $277,150
Net profit $12,850
After you pay the investor you have less than $3k for 6 mos work. And that's if everything goes as planned which NEVER happens in a rehab.
Maybe I was a bit optimistic in my numbers, however, I always try to err on the high side. I'm guessing the FSBO is where our numbers really have a gap. I've had success to this point with FSBO's, but shouldn't rely on that in a business plan.
Thanks for the advice. I was just thinking of a way to really leaverage opm
I also am incorporated and have a partner for the re-hab side of my investing. I agree that you need a better margin to make it worth your while. Using investment money is fine, but talk with a good CPA who knows a bit about this type of investing. You are not bonded as an investment entity such as a stock broker so you will more than likely have to give the investor a first or second lien as security for investment on real estate. Private investors are a great resources, just make sure you play by the rules, be professional and they will come back and do more deals with you.
Still waiting...
What would be the advantage that an investor would see doing it your way? What would be the resons you would give an investor why your way is better for them?
The-Rehabinator
You must wait no longer>>>
Not every wealthy man or woman is well versed in the investment arena. They don't full understand stocks, mutual funds, real estate and especially hard money lending. They inherited money or own a business, but don't necessarily understand how to have their money in the bank make more than 2% for them. If you target these people, and offer to walk them thru the process, a small percentage may be willing. Not all, not alot, but a small percentage. When your talking about doing 10-15 deals per year, you only need to target a couple of thousand people per year with a 1% success rate in order to gain clientel.
I understand where your coming from with "hard money lending" being more lucrative/safe, but not everyone has your knowledge. I am sure there are many areas your lacking in, as well as me.
I see, so you are not basing this on sound business practices or win/win situations, just looking to pluck some sheep. Good luck.
Rehabinator--
Do you have an issue with me I don't know about? Your misreading into my words leads me to wonder how you are successful in any business venture. I'm not talking about deceiving people. I am talking about finding people who have money to alot of money to invest and would rather make 13% in six months watching a home be rehabbed for its next buyer(altruism) then lending money in hopes of the borrower defaulting on the loan (looking for sheep). You can look at this many different ways, but I don't see justification in your comments. You seem very close minded, but thanks for your insight
NJBay
I would not advise getting into a flexing match with The-Rehabinator on this issue as it will not serve any benefit to the readers and the original message will be terribly distorted.
This is just my personal experience from taking part in many flexing matches on this forum.
An old timer on this forum shared with me some time ago to avoid this as it never serves and benefit to the readers of this forum and I forgot about this until today after reading some of my old notes I save from participating on this forum.
It kind of kicked me in the "#^&$^%&" today! And it is so true! He simply let me know to state my position, my belief and stand by it but do not waist time defending it as the intelligent investor will understand and the nay-sayers just go away when their is no fight!
It's just like folks who are creative and those who are not. Creative thinkers become successful and uncreative thinkers simply work for creative thinkers.
Just a little impute form my own experience that I should have followed a few months ago.
Sometimes hindsight gets put aside in the heat of the moment!
[addsig]
I have nothing against you, this is an open discussion right? If you have one opinion and I have an opposite then discussion can lead to one of us being enlightened and learn by understanding the others information better. Real estate investing is an area that has its fair share of shady dealings and techniques that opperate right on the edge of ethical standards. Click here to see a recent perfect example:
http://www.thecreativeinvestor.com/ViewTopic39250-20-3.html
When you make a post about how some people aren't sophisticated enough to know the difference in regard to investing their money, it could easily be taken that you are looking to take advantage of people. The FTC steps in all the time because of people who think using those strategies just falls under the buyer beware category. If you don't have those intentions then great, but it sure sounded like it from your reply, and I have little patience for people who believe getting rich off the backs of others is correct and justified no matter how they do it.
You asked for an opinion about what you were proposing so you got one. I have seen your strategy before.
You think you are going to target "WEALTHY" investors, but in reality you will end up taking on anybody who qualifies, the latter group will be your only takers. When you say wealthy I would consider that people who have a high net worth and a large amount of cash on hand, net worths of 3 million or more. The reality is people like that will not see any appeal to your strategy. There are far less risky ways to make just as much money in real estate for them than actually putting their name on a deed of trust.
What you are talking about smacks of ending up like these idiots who market building duplexs as an investment. We know how those stories end. Unfortunately your strategy will end up marketing to the same group of people, people with small net worths, but with more credit than good sense. The wealthy won't do what you want to do, but those with too much to lose will. Now if you were of the kind who would turn them away and say, no we are targeting the wealthy only, then I would say you are a man of principal, but the likely hood of that is probably not good. You will most likely take what comes your way because you are hungry and don't see the big picture, only your own. Please correct me if I am wrong.
I totally get the big picture your speaking of. I've put forth the belief that I don't wan't to make money by stepping on other people. I've helped people who have bought rehabs save money on their mortgage, whenever selling rehabs in less than affluent areas I leave some equity in the home for the buyer and keep prices affordable. I am not the type of person you ""assumed"" I was & my point was for you to not pigeonhole people in categories because you get some preconceived notion of who or what I am. I know this is a discussion forum and I appreciate all viewpoints and feedback, but lets ask questions and listen first before making comments like your previous.
JohnMichael-
Thanks for the sound advice!
Cool, then let's address the main crux of what you want to do.
How exactly would you define the 'wealthy investors' you would target, because this is where I see the biggest problem with what you are thinking about.
Here is where we differ. I won't be setting a threshold of a predetermined dollar amount to accept an investor. People would be sold on a concept of returns, and recommendations would be made of the risk/reward factor involved...but after that, if a 40 yr old man, with under 250k in savings, wants to roll some of his savings into a project like this to make some extra returns, am I doing him a service by saying "keep your money in the bank"? Am I going to work less hard for him to get the desired return and make it a win/win just because of his net worth?
If the concept works (which all the numbers I run have it positive by a fairly slim margin) and the investors are delivered all that is promised, why are you so adimant on only letting the rich make some good returns?
If I am 40 year old with 250K in savings and If I want to roll in 100K into your plan, then I would need a lot of convincing that you will deliver as promised. Its a problem of trust. I just don't trust you enough that you can deliver on your plans. You have to prove yourself that you can deliver. Warren Buffet started out by doing this. He started by borrowing from friends and family and after a period of time, he made everybody so rich and he took very little into his pocket and gave most of his profits to his investors. He built his plan, his trust that way and look at how successful he his now. I don't see a problem in your plan per se, but I would advice you to focus on how you could win the trust of your investors.
My 2 cents.
In my original question, "wealthy investors" was a label I may have used to freely. I apologize for that. I meant investors who have the disposable cash for such an endeavor. But when you look at it, I couldn't imagine a guy buried in debt or starving for cash willing to invest considerable dollars into a deal for a good return. Most people in that situation are looking to turn small dollars into large dollars, not the other way around.
I would be interested to hear other options you may have. I'm only 24 and am not to stubborn to admit when people know more than me. I'm still new to this game
I have done several projects in the Indianapolis area using a similar premise as yours. The main difference between what I did and what your proposing was that I had a buyer pretty much locked in before starting the project. It saves a lot of headaches/costs to know as soon as the house is done... your done.
Is it difficult to get a buyer locked into a deal before there is a finished product?
NJBAY,
A fundamental principle of being wealthy is avoiding loss as much as creating profit. I can visualize the subset of "less-sophisticated" potential investors you describe, but I would expect you to experience substantial credibility issues given your age and limited deal experience. No investor wants to be your first client, that's what daddy is for! It is also likely a "less-sophisticated" business owner or trust fund playboy relies on professional help from a CPA and/or attorney. These folks are the circuit-breaker. I found it easier to borrow at 7.99% on a credit card than convince others when I began.
Good luck,
Jay