| Private money deal structuring is one of the most | | | | larger gain but not explicit return on investment. |
| important skill sets you can develop as a real estate | | | | Let me submit that you're going to be giving up a |
| investor raising capital. I'm assuming, of course, that | | | | piece of the action either way - so you might as well |
| you've already made the decision to raise private | | | | structure the deal so that both you and the private |
| money - perhaps you have an investor already - and | | | | investor get the biggest benefit. What this means is |
| you're looking for ways to set up the deal (amount | | | | that your loan payment on a promissory note is paid |
| invested, ROI, timing, etc.) so that both you and the | | | | out of your cash flows just the same as divided |
| investor are happy. | | | | profits would. There aren't two sources of cash for |
| Admittedly, this can be a tricky balance to reach. | | | | paying each investment type. |
| After all, you would prefer to pay the lowest return | | | | If all things are equal, a big issue to tackle would be |
| possible to get the money and your investor wants | | | | the tax treatment of the profits for each private |
| the highest return possible for placing their funds. | | | | money investment. For instance, interest paid on a |
| Don't worry: this is nothing devious from either party, | | | | promissory note is taxable as ordinary income to the |
| it's just basic business. | | | | private investor and is a pre-tax expense for your |
| A thousand years ago, when somebody wanted | | | | company/project. Profits paid out of coffers to a |
| capital to make more of something or to take goods | | | | private investor are not tax deductible for your |
| to a far off place- there was most likely a back and | | | | company/project but they may be taxed at lower |
| forth between principal (the investor) and agent (the | | | | rates (e.g. passive income) for the private investor. |
| business owner) about how much of the spoils each | | | | Private money equity sharing could also give you |
| party would get. The middle ground where both | | | | more flexibility in when cash flows are distributed |
| principal and agent meet is the return that is paid. | | | | from your company or investment project. |
| Businesses may change and evolve over time, but | | | | As you evaluate your investment project with |
| guiding principles don't. If you can afford to pay 15% | | | | private capital factored in, you must take all factors |
| per annum to an investor but the investor is happy | | | | into account. I have found many equity deal |
| with 9% on their money, which return are you going | | | | structures to work extremely well as opposed to |
| to pay? | | | | using private money loans. You're still using private |
| This begs the question that real estate investors run | | | | money, but the set-up is different. Many of your |
| into all the time: "should I give up a piece of the | | | | private investors will be at least interested in the tax |
| action (e.g. profits) or simply pay a fixed rate or | | | | treatment of their investment with you. Structuring a |
| return (e.g. promissory note). One option offers the | | | | deal so that they get dividends or capital gains |
| investor a fixed return, which some will like, and the | | | | versus ordinary income could mean the different in |
| other offers the investor a chance for potentially | | | | getting $100,000 or $500,000 in funding. |