Ready to move forward on your next real estate venture but coming up short when it comes to capital? Let’s discuss how to present a real estate investment to potential partners or financier and get that last amount of money that gets you over the hurdle.
For this article I’m going to assume “present a real estate investment” means presenting to a third party who fills in the gap left from a hard money lender to the final closing amount. These folks are known as, you guessed it: gap financiers.
So where should you look for your next gap financier and what should you say to them to help close the deal? Let’s dive in to learn how to present a real estate investment to potential partners.
Where to Find Gap Financiers
In most cases your next gap financier is going to be a loved one from your social circle, as they’re the lowest hanging fruit when it comes to securing that small amount (relatively speaking) you need to close on the property.
To find the best person to partner with, make a list of everyone you know who has relatively easy access to the money (normally $20k-$30k) that will help cover the gap between what your hard money lender is willing to give and what your final closing costs will be. After you’ve brainstormed the most likely candidates, rank them from “most likely” to “least likely” and start reaching out.
This is the time when “soft skills” come into play and it’s best that you play this as delicately as possible, as a rejection from a family member hits differently than a rejection from a stranger. Use your natural selling ability to your advantage, but remember to keep the personality they know front and center. No one wants to feel like they’re being pressured into something that they’re uncomfortable with, so be sure to listen with love and understanding. Don’t get defensive, but be prepared on how you’ll handle hard questions.
What To Bring to an Investment Meeting
Now that you’ve secured a meeting with your future business partner, let’s start laying out what you’ll need to make your case as to why this is an investment worth jumping into.
The easiest way I’ve found to move an investor from “potential” to “on board” is by giving them as much evidence as possible that this is a smarter way to use their money than to leave it in a savings account, earning a pittance of an interest rate.
Here are some things you should have at your investment meeting:
- Value assessment done independently. Show demographics, market competitiveness, and any similar homes that have recently sold to show this won’t be a property that turns into an albatross around your and their necks.
- Construction bid for any work that needs done. I like to have at least 2.
- An appraisal from a third party.
- Estimated profit margin and your reasoning behind that number.
How to Present a Real Estate Investment
There are many ways you can entice someone to invest in a real estate venture with you, but the two most popular methods are debt and equity.
A debt offer is when you promise to pay them back the principal plus an additional set interest rate. It’s up to you what number you want to offer, but take into account how much money you need and how long you estimate it will take to turn a profit on this investment.
The upside to making a debt offer is that you’ll most likely end up paying them less than you would an equity offer. The downside is that you take on all the risk, and if the property doesn’t sell at what you forecasted, you’ll still be on the hook for the loan and interest.
An equity offer, also known as a joint venture, is when your financier gets a cut of the profits instead of interest. The good side of an equity offer is that you’re sharing the risk instead of taking it all on your own, and you won’t be obligated to pay their initial loan back. The bad news is that you’ll be splitting the profits and this may end up costing you much more than an interest rate would have.
Be Transparent and Get it In Writing
As this person who becomes your business partner will most likely be a loved one, save yourself a lot of family drama and be as transparent as possible about the risk involved with coming into a real estate venture. I also advise you remove the doom and gloom by reiterating the evidence you have that shows why the risk is a low probability, though it is still possible.
Make sure they understand the terms of your agreement and what they can expect in terms of repayment and timeline. Then get everything in writing. Since they’re a loved one you may feel like this is an unnecessary step or may insult them, but believe me, you’ll be protecting not only yourself, but their investment, too.
Above all be careful and cautious to not strain relationships over this. Make sure the risk/reward is clearly understood and that they clearly understand the due diligence you’ve taken to ensure this is a profitable venture for both of you.
What Should Be In Your Contract with Your Financier
Once you’ve got the go ahead, start drafting a contract that makes it as clear as possible what responsibilities fall onto whom. Think of it like a business plan now that you are partners, and make sure there are a few key points established:
- Amount they’ll be investing and how they’ll be delivering that amount to you. Will it be in installments or paid in full? When will their investment be expected to be received and what happens if that deadline is missed?
- What they can expect in terms of repayment? Is this an equity offer or is the loan interest-bearing? How will you be paying them back and what schedule should be expected?
- What their investment “buys” them in terms of decision-making or role responsibilities. No one wants a backseat real estate investor, so make sure they know how much say they have in the property and its sale.
- What the exit strategy looks like when the property is sold. Can they expect to be an ongoing partner in your real estate investments or is this a one-time only deal?
It’s Really Not as Hostile as It Sounds
While laying it all out clearly and in a legal document can feel a bit “too” official for family or friends, having clear expectations on both ends will go far in ensuring that not only is the venture profitable, but that the relationship doesn’t suffer due to a misunderstanding.
In the end, bringing on someone in your social circle who can close the gap between what you have and what you need can really be a fun way to involve loved ones in your business. Imagine how excited they’ll be to see your business take off thanks to their help! Be sure to cover your bases with evidence, clearly lay out the expectations, close the deal, and start working towards growing your real estate investing business now.