Whether you are an individual looking to buy and flip a house or pursuing a small development and need an equity partner, finding investors for real estate is tricky. The first step is to find out how you want to structure the investment, including who gets paid what and when, assuming the project is successful. The next step is finding out where to get the capital you need for your real estate project. You have many options, from friends and family to investing clubs, crowdfunding sites, and more.
Real estate is one of the quickest, most surefire ways to build wealth. Not only is it one of the only assets from which most people can access leverage (via mortgages), it comes with significant tax advantages if structured properly. Whether you are a seasoned commercial real estate developer with a track record spanning years or a first-time real estate investor looking for your initial investment property deal, you still need to find investors. There are two steps to finding property investors: structuring the deal and finding the investors. You can’t do the second one without the first one, so let’s start with how the structuring part works.
Step 1: How to structure a deal
The first step when looking for investors for a real estate deal or an investment property is to decide what you need them to invest in and how you want to structure the deal. This pertains to when they get paid back, how much they get paid back, and who gets paid back first. You need a complete and clear back-to-front plan regarding the investment opportunity.
Although there are many ways to structure real estate deals, let’s start with a simple example.
Example: Buying a rental property in cash
Let’s say you’ve seen a rental property that you absolutely love. With a little refurbishment, you can increase the yield (percent return you get from rental) substantially. Furthermore, existing regeneration in the area is attracting tons of hipsters and yuppies, which will surely drive up the rental prices and, ideally, property prices as well. You spot a property for $400,000, and if you pay cash, you can get it for $350,000.
You will then need to put another $25,000 or so into the property to get the estimated rental you desire, based on advice from area real estate agents. Let’s model it out below.
You can see that after you buy the property, pay closing costs, and refurbish the property, the whole cost is $378,500. You have $250,000 liquid (in cash in your bank) that you can spend on this, but you need the additional $128,500 from investors.
How to structure the $128,500 you need from investors
You know you need to raise this $128,500. If you find one investor, it’s easy, right? But what do you do if you need to split this money up, and how do you structure it? Furthermore, you are the one doing everything, so you deserve more of the overall profit. So what’s a smart way to structure this?
Preferred return + upside
You can offer an investor a preferred return on their money invested plus a portion of the upside, or profit.
This means that when money is paid from an investment, the investors with “preferred return” status get their money first. For instance, if an investment is predicted to return 10%, and an investor has a preferred return of 5%, they get their 5% first no matter what, as long as the investment generates at least 5%.
A portion of the upside
A portion of the upside is how much the investor gets beyond their preferred return. In a rental property, there are two factors that can produce an upside: the rental income derived from the property as well as the profit from selling the property.
Example of a rental property with preferred return + upside
Let’s say that you offer your investors the following deal. They will receive a 5% preferred return from the rental property that is paid annually from the rental income plus 15% of any upside from the rental income above the 5%. Remember, should your yield increase, your overall return will be greater as you have a much greater portion of the upside (85%).
Should you sell the property, then they will receive 20% of any upside that you get from the selling price. So how to explain this? Give your investors a five-year investment plan.
|Current annual net rental||$18,000|
|Annual net yield||5.14%|
|Future annual rental||$33,000|
|Future net yield||9.43%|
So in this scenario, you assume a 9.5% net yield (close to the estimated rental) on your property over five years, although that could very well go up. You pay your investors a preferred return over five years of 5% based on the rental income + %15 of the upside (income – preferred return). The investors will make $54,127 over five years just due to the rental deal (5% preferred + 15% upside). This comes up to a total return of 42.4% on their capital after five years, just from the rental portion.
|Rental return (9.5% yield)||$35,958|
|Rental return * 5 years||$179,788|
|Investors’ preferred return (annual)||$6,425|
|Investors’ preferred return (5 years)||$32,125|
|Investors’ 15% upside||$22,149|
|Total owed to investors for rental||$54,274|
|Total profit after paying investors||$125,513|
|ROI for investors on rental||42.24%|
|ROI for yourself on rental||50.21%|
After you pay them out, you pocket the rest, which comes to $125,513, or a 50% return on the $250,000 you put into the deal.
Return from value appreciation
The preferred return you offered was just on the money they invested. Just like they were entitled to an upside on the rental after their preferred return, they are offered an upside when you sell the property in five years. In this case, based on market forecasts, you think you can comfortably sell this property for $500,000 after five years. Let’s model out how that works below for you and your investors.
|Property value after 5 years||$500,000|
|Selling costs at 5%||$25,000|
|Total available after sale||$475,000|
|Profit/upside after investment||$96,500|
|20% to investors||$19,300|
|80% to you||$77,200|
You sell the property in five years for $500,000, and you assume 5% costs to sell. These could be costs like an agent’s commission or notary fees. This leaves you with $475,000 to split. Once you subtract the initial money invested ($378,500) from the total you got from the sale, you are left with $96,500. You give the investors 20% of this, and you pocket the rest, which leaves you with $77,200 and $19,300 for the investors.
Remember, the preferred return is just on the money they invested. No matter what, they should get the preferred return annually on the money they invested as long as it generates at least 5% via rental income. They are then due a portion of the rental income after their preferred return, plus a portion of the upside. So how much are they making in total? And how much are you making? Let’s look below.
|Total profit for investors||$73,574|
|Total ROI for investors||57.26%|
|Total profit for you||$202,713|
|Total ROI for you||81.09%|
|Total annualized return||16.22%|
Based on this model, you make a total profit of $202,713. This equates to an 81% return on the $250,000 you invested, which equates to a 16% annualized return over five years.
The investors receive $73,574, which is a 57% return on their $128,500 instead, which equates to an 11.5% or thereabouts return.
So now you have a deal and can split it up
Now you have a mini-deal structure. The great part about this is that it doesn’t really matter how much they invest. You might not know someone with $128,500 on them, so you can split the investment up into pieces. Say $25,000 to start. Each investor needs to invest a minimum of $25,000. They receive a preferred return of 5% + 15% of the rental income upside + 20% of the upside on a sale. So, in general, if things work out as predicted, each investor should receive around 11.5% annually on their money.
Now you have a pitch! What are you offering?
You can say you are offering “an opportunity to invest in a real estate rental property, with a 5% preferred return over 5 years + 15% of the rental upside and 20% of the sale upside. Estimated returns are around 11%+ annually.”
Step 2: How to find the investors
So now that you know what you are offering, it’s time to look for investors. Investors can be found anywhere, even on the other side of the globe. Adam Hunnam is a real estate broker and professional who has been brokering property investment opportunities in London to Asian investors in Hong Kong for the better part of 25 years. “Asian investors typically will invest in off-plan property in the U.K. (or even in secondary property) without physically viewing the home,” he says. “They recognize that gains can be made during the build period, especially in areas of regeneration or in areas offering excellent options for education. They would prefer an established brand as that lowers the risks associated with off-plan.”
However, most of us will probably be looking for investors through more traditional means. Here are some common methods for finding real estate investors to whom you can pitch your investment concept.
Friends and family
You never know who might have $20,000 or $40,000 in a bank account and is looking to put it somewhere better. Maybe your best friend is a real estate agent. As long as you present your plan nicely, with an Excel model to back it up, going to friends and family is a tried-and-true method for finding your first real estate investors. Even developers with track records looking for investors will solicit their friends and family and give them good deals.
Real estate investment clubs
There are local real estate investment clubs everywhere in the U.S. Find out where they are and see if you can join or at least attend a meeting. These will be seasoned professionals and other like-minded individuals who are looking for investment opportunities. If you are putting your own skin in the game (i.e. your own money) and know what you are talking about when you mention deal structure, this could be a good route.
You can ask on social media and even look at some crowdfunding sites as opportunities. You might be surprised by how much interest a TikTok video of you dancing around and offering 5% preferred returns and portions of the upside can generate. Again, with crowdfunding, the returns stay the same as percentages. Thus, you can crowdfund small portions if you want to and offer the same returns numbers-wise.
Michael Bardales, director of mortgages at Radius Mortgage, says tech has changed the landscape for accessing investors. “Platforms such as Roofstock, Fundrise, and Crowdstreet are specifically tailored to investment networking,” according to Bardales.
Explore your crowdfunding options below.
Funds, banks, partnerships, family offices, and loads of institutional investors are looking for real estate deals. These will be much bigger in size, and you will be working with experts in the field. Dealing with these types of investors can be complicated and you will be working with a number of documents that have acronyms like MOU and LOI. Make sure you are ready before you pursue a deal with a more experienced investor.
What does a private investor do?
A private investor is someone that invests their own money in a company, maybe through their own name or through an LLC. They are in contrast to an institutional investor who is investing corporate money or other people’s money through an institutional structure.
How do I find investors for a syndicate?
A real estate syndicate is a real estate investment partnership. You can find investors through various means, such as social media, an investor club, or friends and family, for example.
- Whether you are an individual looking to flip a house or pursuing a small development and need an equity partner, finding investors for real estate is tricky.
- First, you need to structure the investment deal. Determine who gets paid when and how much. No matter the investment, a proper deal structure is a must.
- One example is a preferred return plus a percentage of the remaining profits.
- Once you have structured the deal, you can now approach investors. Everyone from friends to institutional investors can be on the table.
View Article Sources
- Overview of Types of Real Estate Investment – CFA Institute
- Mission – Real Estate Investment Association
- Rental Property Tax Deductions: Saving More Money – SuperMoney
- How to Finance Investment Property – SuperMoney
- Wholesaling Real Estate: What Is It & How Does It Work? – SuperMoney
- How Do I Pick a Profitable Rental Property? – SuperMoney
- How To Become An Investor In 6 Steps – SuperMoney
- Investing In Real Estate Pros and Cons – SuperMoney
- How to Invest in Real Estate: An Expert Guide for Beginners – SuperMoney