Before an investment is made, smart investors like to plan as much as possible to get approval for a deal. A structured deal is one way that can be used to purchase an investment property by using very little to no upfront investing of personal cash. There is a process that can be effective for adults who perform a strict series of steps. This deal structuring guide for beginners can provide a solid investing foundation.
Before a person who has enough funds will agree to a deal, he or she will likely want to know how much profit is available. Investors will always consider risks involved, but will largely be concerned with the potential profit on a piece of real estate.
What an Investor Expects:
2. Return on Investment
3. Management Plan
Going into a situation where private money is being asked from one or more investors will require a person to showcase the listed expectations above. A trust factor is important with most people and making sure that a person who will receive the funds is competent to successfully manage the secure investment is essential.
Once the expectations are validated, an investor will likely be concerned with the length of time that is needed to return the initial investment plus interest. When people loan money, a certain rate of return is expected that can be negotiated. Having a clear picture of what type of ROI is available in a property as well as a turnaround time for the distribution of funds is crucial.
Talk is cheap when deals are made. Real estate investors want to have a guarantee in writing about the returns that will be distributed throughout the course of a year. A COCR or cash on cash return is the most common type of payments included in an investor deal contract. By extracting operating expenses from the total ROI, what is left is the actual returns that can be calculated for a cash on cash investment percentage.
Once a deal is reached, a time table for the distribution of the funds will be setup. Some people hold out a portions of the money until certain goals are reached. Investors weigh the risks of buying properties regularly and know the pitfalls. Successfully managing the investment is a key part of making investors happy.
Most investors will expect an LLC or similar business formation when going into business with a borrower. A new company can be formed to hold the real estate that will be purchased under the operating agreement. Contracts and agreements must be legal in the state where business will be rendered and an attorney will be required to draft and review all documents in a deal.