On the property developer journey, there comes a point where you suddenly realise you need other people's money to keep going.
The reasons for that are almost infinite, everything from already having all your funds in one deal and finding another, through to the size of the deal being much bigger.
Interestingly, there are almost as many different investors as there are reasons. But they tend to fall into two main groups.
To begin with, though, let's look at the things nearly every potential investor or money partner have in common.
Returns
Let's get real here. If someone's investing money into your deal, they want to earn something in return. Otherwise why do it?
Okay, I get that someone may love you dearly and will invest money to help you out, but that's rare.
Think about it for a minute. If you have $100k, and you put it into a term deposit, the interest rate might be microscopic, but it's still a return.
So as a property developer, you need to make sure that the returns from investing in your deal are a lot better than microscopic, given the risk.
Your Deal Stacks Up
In the last paragraph I mentioned risk, and having a deal that stacks up is a big factor in reducing risk.
Now, I'm not talking about a deal that stacks up because you've massaged all the numbers to the point where you've gone way past blue sky and into la la land territory.
I'm also not saying you need to be so ultra conservative with your numbers that your deal doesn't stack up.
Like Goldilocks, you need to find the point that's just right - not too gloomy, not too optimistic.
Why is this so important to investors? Obviously it matters if someone's looking for a profit share arrangement - they want to see profit!
But it also matters to an investor wanting an interest rate return. The more profit they see in the deal, the better the chance that there will be funds available at the end to pay out their interest.
At this point I want to add a little bit about being fair and realistic. As an investor, it's very easy to fall into the trap of thinking "hey, look at all that profit, I should be getting a bigger share".
I get it - you're risking your cash to help the deal happen. But it's very easy to lost sight of the developer's risks and all the work they have to do to get a deal over the finish line profitably.
I'd recommend you check out some Real Deals from my Property Developer Network meetups to help you gain an appreciation of what a property developer goes through to complete a deal.
Just putting it out there! Don't let those dollar signs cloud your thinking.
Okay, now that we've looked at the two things most investors are looking for in your deal, let's look at the two main groups of investors.
Certainty Investors
The name is self-explanatory, but essentially these investors have a low appetite for risk and want to know exactly what return they'll be getting from a deal.
They're interested in investing for an interest rate return for a set period. That way, they know how long their money will be tied up, and what they'll walk away with at the end.
Project profitability is still important, because knowing there's a good profit level at the end helps to confirm the project is relatively low risk.
Maximum Return Investors
This group of investors is all about getting the best bang for their buck. Basically, they want a piece of the action.
As a result, they're much more likely to go into a deal on a profit share basis. This means they're taking on a similar level of risk as the developer and could potentially lose some or all of their money.
Again, having a solid feasibility with realistic numbers is crucial for this investor. It's also important to have a detailed chat about roles and responsibilities in the deal, as often this type of investor wants to be involved. You need to have clear boundaries set in place in your written agreement.
One final tip when dealing with investors - never use words like "guaranteed returns" when talking about your deal. If there's one thing I've learnt from many years of Real Deal presentations, it's that stuff happens. It's almost never expected, and it always costs money.
Sometimes the cost is small and doesn't matter in the overall context of the deal. But sometimes it's enough to throw a deal from positive into negative territory. Which is why bodies like ASIC will come down on you like a tonne of bricks if you claim returns are guaranteed.
As I said in the beginning, as property developers our lives would be a lot easier if we only ever invested our own money in our deals. If you are happy doing one deal at a time and only doing deal sizes you can afford, then you can stay in that space.
But if you want to move ahead more quickly, at some point your funds will run out and it's vital that you start to think about the deals you're doing from an investor's point of view.
The reasons for that are almost infinite, everything from already having all your funds in one deal and finding another, through to the size of the deal being much bigger.
Interestingly, there are almost as many different investors as there are reasons. But they tend to fall into two main groups.
To begin with, though, let's look at the things nearly every potential investor or money partner have in common.
Returns
Let's get real here. If someone's investing money into your deal, they want to earn something in return. Otherwise why do it?
Okay, I get that someone may love you dearly and will invest money to help you out, but that's rare.
Think about it for a minute. If you have $100k, and you put it into a term deposit, the interest rate might be microscopic, but it's still a return.
So as a property developer, you need to make sure that the returns from investing in your deal are a lot better than microscopic, given the risk.
Your Deal Stacks Up
In the last paragraph I mentioned risk, and having a deal that stacks up is a big factor in reducing risk.
Now, I'm not talking about a deal that stacks up because you've massaged all the numbers to the point where you've gone way past blue sky and into la la land territory.
I'm also not saying you need to be so ultra conservative with your numbers that your deal doesn't stack up.
Like Goldilocks, you need to find the point that's just right - not too gloomy, not too optimistic.
Why is this so important to investors? Obviously it matters if someone's looking for a profit share arrangement - they want to see profit!
But it also matters to an investor wanting an interest rate return. The more profit they see in the deal, the better the chance that there will be funds available at the end to pay out their interest.
At this point I want to add a little bit about being fair and realistic. As an investor, it's very easy to fall into the trap of thinking "hey, look at all that profit, I should be getting a bigger share".
I get it - you're risking your cash to help the deal happen. But it's very easy to lost sight of the developer's risks and all the work they have to do to get a deal over the finish line profitably.
I'd recommend you check out some Real Deals from my Property Developer Network meetups to help you gain an appreciation of what a property developer goes through to complete a deal.
Just putting it out there! Don't let those dollar signs cloud your thinking.
Okay, now that we've looked at the two things most investors are looking for in your deal, let's look at the two main groups of investors.
Certainty Investors
The name is self-explanatory, but essentially these investors have a low appetite for risk and want to know exactly what return they'll be getting from a deal.
They're interested in investing for an interest rate return for a set period. That way, they know how long their money will be tied up, and what they'll walk away with at the end.
Project profitability is still important, because knowing there's a good profit level at the end helps to confirm the project is relatively low risk.
Maximum Return Investors
This group of investors is all about getting the best bang for their buck. Basically, they want a piece of the action.
As a result, they're much more likely to go into a deal on a profit share basis. This means they're taking on a similar level of risk as the developer and could potentially lose some or all of their money.
Again, having a solid feasibility with realistic numbers is crucial for this investor. It's also important to have a detailed chat about roles and responsibilities in the deal, as often this type of investor wants to be involved. You need to have clear boundaries set in place in your written agreement.
One final tip when dealing with investors - never use words like "guaranteed returns" when talking about your deal. If there's one thing I've learnt from many years of Real Deal presentations, it's that stuff happens. It's almost never expected, and it always costs money.
Sometimes the cost is small and doesn't matter in the overall context of the deal. But sometimes it's enough to throw a deal from positive into negative territory. Which is why bodies like ASIC will come down on you like a tonne of bricks if you claim returns are guaranteed.
As I said in the beginning, as property developers our lives would be a lot easier if we only ever invested our own money in our deals. If you are happy doing one deal at a time and only doing deal sizes you can afford, then you can stay in that space.
But if you want to move ahead more quickly, at some point your funds will run out and it's vital that you start to think about the deals you're doing from an investor's point of view.
