All Topics / General Property / private investors

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  • Profile photo of arcticarctic
    Participant
    @arctic
    Join Date: 2002
    Post Count: 3

    hi

    hope someone can help me.whats the best way to go about organising private investors to come on board with you.i have a list of people who would do it(family,friends etc) but im not sure what to offer them in return and do i set up contracts with them through a solicitor.

    say a property was 40000 and it was rented out for 110 per week .do i get them to provide deposit to me and i get the loan and then give them a return on their deposit .any help would be great.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    Most people seem to offer between 12 to 20% to their investors. They simply borrow money form them and pay interest. You will need a loan agreement drawn up by a solicitor.

    Terryw
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    Profile photo of Tim_3Tim_3
    Member
    @tim_3
    Join Date: 2004
    Post Count: 35

    I would be very interested in answers to this question as well. Where I am coming from is the opposite end though – what should I expect if I am putting in money (up to $100k) for private investment arragnements.

    Personal guarantees? Contracts?

    How do you go about securing your investment??

    Profile photo of jscottjscott
    Member
    @jscott
    Join Date: 2003
    Post Count: 23

    Private lenders funds can usually be secured by way of an unregistered 2nd mortgage with registered caveat or a seperate loan agreement with a registered caveat.
    It depends on how much money your putting in. If you were to cover the entire cost of a property for example then you would get the first mortgage.

    Another way of doing it, which is common is a Joint Venture Agreement.

    jason.

    Profile photo of Michael RMichael R
    Member
    @michael-r
    Join Date: 2003
    Post Count: 302

    Generally your best and easiest option is to only raise the “shortfall” capital privately – being the difference between what a primary lender i.e. bank, will loan and the cost of the property.

    As noted, private funds typically incur a higher rate of interest than a bank.

    The two most common scenarios when forming a joint venture are 1. offering private investors a rate of interest, or 2. offering equity – a percentage of the ownership in the property.

    The “interest” option can be the most complicated if you intend offering the private investors recurring payments. If for any reason an interest payment [which may have to include principle] cannot be met, this can create disharmony which may potentially compromise the investment.

    The “equity” option is often the easiest method of raising private capital, but it can also cost more when comparing to an interest payment over the lifetime of the investment. When investors take an equity position they must be prepared to retain their money in the property until such time as the property is sold or they are otherwise cashed out.

    The key in the scenario you have outlined is not to be overly concerned with “maximizing your return” at this stage – assuming this is your first investment property. Secure the property using the easiest method which offers the least risk, then as future opportunities arise structure any loan on terms more favorable to you.

    A joint venture agreement, or similar, needs to be drafted by a qualified lawyer. Do not attempt to save a few dollars when it comes to partnership contracts.

    It is recommended that the agreement is tailored for this one investment. The next investment has its own agreement drafted and so on.

    There should also be a clear “exit strategy” included in the agreement, so that everyone is aware of the “term of investment”. An option to extend is common subject to the investor’s approval at the time.

    Joint ventures of which you are proposing can start out on a positive path, but often one of the investors can become disgruntled or require their money out for whatever reason, which can again compromise the investment. This “risk” is often compounded when the investors are friends and family. The agreement must account for such events – a qualified lawyer will include necessary provisions.

    In terms of security, the bank or another “primary lender” will take a note over the property – meaning their debt must be paid first and foremost. Any other debt is subordinate to the primary lender.

    A second note/mortgage is not required if the shortfall is being invested by the joint venture partners. The agreement between the parties will outline terms and conditions associated with money loaned, return on investment, any security, etc.

    If a third party becomes involved, they may require a second note, which is subordinate to the primary lender, but must be paid before you and the joint venture partners receive any payment. Being a $40,000 investment I very much doubt a third party will be required.

    — Michael

    Profile photo of Michael RMichael R
    Member
    @michael-r
    Join Date: 2003
    Post Count: 302

    “what should I expect if I am putting in money (up to $100k) for private investment arragnements.”

    There must be some form of agreement/contract.

    Your return on investment will reflect the “risk”, i.e. secured or non-secured, market conditions, etc, and the term of investment.

    The higher the risk, the higher the return.

    Make sure a qualified lawyer reviews the agreement/contract before commiting any funds.

    — Michael

    Profile photo of wealth4life.comwealth4life.com
    Member
    @wealth4life.com
    Join Date: 2003
    Post Count: 1,248

    Michael spells it out very well here, u can write a book on this subject.

    Arctic; be careful taking money from people, r u experienced, what if it goes wrong, u can only borrow money from people u know personally and less than 20 in total.

    What other security do u have to offer the investor, it must be a win win, have u done the numbers correctly, have u run them past an accountant, dont go on possabalities go on realities, can u afford to pay 20% return, what if the interest rates go up etc etc.

    Yes i am trying to scare you, remember at the end of the day u are taking money from unsophisticated investors … regards Phil

    Profile photo of Michael RMichael R
    Member
    @michael-r
    Join Date: 2003
    Post Count: 302

    “u can only borrow money from people u know personally and less than 20 in total.”

    The above is somewhat correct.

    The Australian Securities and Investments Commission [ASIC] stipulates that you do not need a prospectus if you are raising less than $2 million from 20 investors in any one year.

    There is also an exemption to the prospectus rule if the money is raised from so-called sophisticated investors who are willing to invest in amounts of $500,000.

    A “sophisticated investor” needs to be certified by an accountant or financial planner as someone who is an experienced investor with sufficient assets and knowledge to be described as sophisticated.

    While the exemptions mean a prospectus is not required to be filed or registered with the ASIC, a borrower must still provide detailed information to all potential investors.

    The expectation is there will be enough information for an investor to make an informed decision.

    “What other security do u have to offer the investor”

    “Security” is not a necessity when raising capital by way of a joint venture. The investors decision is often based solely on the information provided [business model], including financial projections, and rate of return/equity.

    I have structured many joint ventures, some of which raised significant capital, and have not once offered any form of security.

    “can u afford to pay 20% return”

    If you decide to proceed with an interest rate then the feasibility study will determine the rate.

    Avoid mentioning any rate of return to investors until you have an idea of what they will accept and you know what you can offer.

    “what if the interest rates go up etc .”

    The interest rate defined in the joint venture agreement is final. This rate is not influenced by market factors unless it is based on the Official Cash Rate [OCR], i.e. interest defined as “OCR + x points”. This variable option is not recommended for the type of transaction you have outlined.

    “at the end of the day u are taking money from unsophisticated investors”

    Because the investors are friends and family does not necessarily mean they are unsophisticated.

    — Michael

    Profile photo of FWFW
    Member
    @fw
    Join Date: 2002
    Post Count: 478

    When I have private investors who put in a set amount of money at a set interest rate, I always give them a loan agreement, and completed documentation for a second mortgage. They hold the mortgage paperwork, unregistered, unless there is a dispute. They also have the right to put a caveat on the property, although none of my investors have.
    I try to keep it simple!

    Keep smiling
    Felicity 8-)

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