What's a reasonable return on investment to offer?

[iano086]

I've a (reasonably) proven business going that could scale up notch or two if it got some cash investment. I've also got a businessman friend whose got a 1/4 mil cash he's looking for a return on and he's happy to invest in me (he's done so before in the business to good effect - albeit for a lesser amount).

The essentials I can think of are:

- my being able to offer a guaranteed return: were things not to work out as rosily as planned, my own (approximately the same as his) capital investment amount would take all the hit before the agreed return on his investment be diminished. Assume for the purposes of discussion that it would take an economic meltdown of Armageddon-proportions for this to occur.

- his capital would be locked in for about a year before payout (at which point he could chose to repeat invest). There is a clear enough exit point. He's happy enough with those timescales.​

What kind of returns would other vehicles having this level of security/timescales typically offer? This so that I can suggest a generous but not ludicrously-generous return for his investment in me.

Thanks for any advice / further expansion on my limited knowledge of the area

 

[Palerider]

If I read this correctly there would be no security with return of the €250k starting at the end of 12 months.

I have done some private investing such as you outline but never on an unsecured basis, you will not get that money from any traditional lender due to lack of security, if you could you would pay maybe 8%+ with a likely arrangement fee and also cover any legal exps.

Your friend wants to help you, you want to be fair, suggest you work it out between you, rates in the teens could be expected IF you could get it elsewhere privately.

 

[iano086]

If I read this correctly there would be no security with return of the €250k starting at the end of 12 months.

I have done some private investing such as you outline but never on an unsecured basis, you will not get that money from any traditional lender due to lack of security, if you could you would pay maybe 8%+ with a likely arrangement fee and also cover any legal exps.

Your friend wants to help you, you want to be fair, suggest you work it out between you, rates in the teens could be expected IF you could get it elsewhere privately.

Assume the friends €250K is secured and that the return on his investment (whatever rate it happens to be set at) is also secured.

 

[iano086]

Any investors out there willing to put a figure on the return they'd jump at given the above model? 4% 6% 8% ...??

 

[cremeegg]

If the investment was risk free, then 2% would be generous.

But the investment is not risk free. Where would things stand if for example you got sick and were unable to work.

I suggest a reasonable return on the money say 5% plus "secured" as you outlined above, plus some additional % of the extra profit generated by the new investment. Maybe 40% of the profit, until he is paid back

 

[Steven Barrett]

Assume the friends €250K is secured and that the return on his investment (whatever rate it happens to be set at) is also secured.

Who is providing the security?

How established is your company and how profitable is it? What is he investing in? What are the risks involved?

Then look at what he can get. Leave the money on deposit and he gets 1.1%. Invest in established listed, multinationals, he can get a dividend yield of 4% plus the same again in potential growth and less risk of losing his money.

The higher the risk, the higher the return he should be looking for. If I was investing in one SME, I would be looking for double digit returns on my investment.


Steven
www.bluewaterfp.ie

 

[Palerider]

Who is providing the security?

The higher the risk, the higher the return he should be looking for. If I was investing in one SME, I would be looking for double digit returns on my investment.


Steven
www.bluewaterfp.ie

Totally agree so would I.

Your investor needs to be paid for accepting risk, check with your Bank and see what rate they would apply for lending on a fully secured basis and add a couple of percent to that given nature of the borrowing and variables, BOI will charge 5.74% secured, ( reference their website ), all that said for me that would not be enough, if your proposal stands then I'm sure a Bank will look at it, they are open for business and you could lengthen the term to suit cashflow.

 

[Dr.Debt]

Secured business borrowing from bank costs 6-8%
Investors are currently seeking 10% return on commercial property which is obviously secured on the property itself
Unsecured investment in a small private close company will command a return of at least 15%
Secured investment in a small private close company will command a return of at least 10%

If I was the investor that the Op is referring to and the investment was considered secure, then id be seeking 10%
If the security was extremely reliable and easily liquidated, I may reduce to 8% but not below that.
Without knowing the details and the nature of the risk and the quality of the security, its hard to give a definitive answer

 

[iano086]

Thanks for the insights..

The situation is thus:

Run-down or otherwise attractive residential property is purchased and flipped. It's been done already a number of times and the pre-tax return on capital input has been approx 50%. The security involved (for my friends capital and his return on capital) is solid in the sense that: in order for them to be impacted, the foreseen 50% return on the project would need to fail to materialize THEN my own capital input would need to be consumed completely. Only then would his return, and after that, his original capital, be negatively impacted.

I understand the property market is a movable feast but his exposure time (where his capital is locked in) is approx 6-9 months* and I don't envisage negative movement of the kind that would enable the above security to be breached. Even the most recent crash didn't see property fall overnight to that degree.

* I said above that he would be locked in for a year. Better said, I'd be starting the clock now on the duration for which I'd be paying a return but wouldn't draw down his capital until the next property needed closing on. That'd be some months down the road.

 

[cremeegg]

So your €250k plus his €250k means you have €500k to spend.

When it comes time to sell and things didn't work out and you have to sell for €400k. He gets back €260k, his investment plus a return, and you get back €140k.

That will never happen. Unless you are a saint you will want to try to regain the money and he will want to walk away.

He would be mad to get involved on any basis except 50:50. with maybe you getting an extra €5k from the sale for your time

As a business plan this is not low risk

 

[Dr.Debt]

There are lots of amateur investors out there and each of them will price the risk differently. Have you asked your friend what return he requires ? Is the profit taxed as capital gains tax or income tax in your particular case. Does the investor get a 1st charge over the property that is being purchased ?

From what you describe, and with my investment secured on the property and with a good legal agreement in place, Id be happy with around 12% net of tax.

 

[iano086]

So your €250k plus his €250k means you have €500k to spend.

When it comes time to sell and things didn't work out and you have to sell for €400k...

..and for €400K I do sell. I go drown my sorrows and, after nursing the hangover, head around to his place with a cheque for €250K plus X (where X is whatever ROI was figured appropriate for a well-secured investment).

That will never happen. Unless you are a saint you will want to try to regain the money and he will want to walk away.

I'm less saint and more friend. I'd have absolutely no problem ensuring his investment in me (and I stress, it's in me) is paid back as agreed - right up to the point where all my capital is gobbled up.

He would be mad to get involved on any basis except 50:50. with maybe you getting an extra €5k from the sale for your time

As a business plan this is not low risk

There's a little bit more involved in turning around properties than €5K could cover.

Does your assessment of risk rest on what you think I would do in the face of diminishing project return / own capital being eaten into. Or in the actual proposal itself? If sticking to the latter and working on the premise of the indicated level of security/buffer before his capital / ROI is impacted, what kind of ROI would you be suggesting?

 

[cremeegg]

There's a little bit more involved in turning around properties than €5K could cover.

Thats probably true. You should agree a figure at the outset.

Does your assessment of risk rest on what you think I would do in the face of diminishing project return / own capital being eaten into. Or in the actual proposal itself?

On the actual proposal itself.

If sticking to the latter and working on the premise of the indicated level of security/buffer before his capital / ROI is impacted, what kind of ROI would you be suggesting?

50% of the profit

€250k contributed each. Sell for €600k. Thats €10k for you for your time (or what ever figure you both agree in advance) and €590k split equally between you.

And if its a loss you both share that also. Just my suggestion. Its not fair on him if he doesn't get some of the upside. After all with the above figures if you gave him 10% of his investment that would be €275K for him and €325 for you, hardly fair.

 

[iano086]

There are lots of amateur investors out there and each of them will price the risk differently. Have you asked your friend what return he requires ?

He's easy enough going on things - he wants to give a dig out but also wants to get his money working. He'd be happy with whatever but I'm trying to ensure the thing is done somewhat on the basis of typical amounts vs. risk profile. I don't want to take advantage of his largesse nor do I want to overcook the return. This may well be a precursor to others investing so I need to orientate myself.

I suppose I'm looking to see what would be a non-amateur approach be given the assumption of very little risk. That is: forget about the merits of my own case and just look at what are typical returns expected for a very low risk investment with lock-in for 9 months to a year.

Is the profit taxed as capital gains tax or income tax in your particular case.

Some income taken by me (more at the start and diminishing as a % of each project as projects start overlapping - the project duration is long but I'm active only for a portion of it, say 33% of that duration). Profits (after deducting his roi) going into increasing capital for the next project.

Does the investor get a 1st charge over the property that is being purchased ?

We hadn't discussed the arrangement on that but would do that or some other way of ensuring his first call. We trust each other implicitly but would formalize things just in case of God knows what. In the case of my death, my wife could do a runner..

From what you describe, and with my investment secured on the property and with a good legal agreement in place, Id be happy with around 12% net of tax.

Thanks for putting a number on it. Does anything I've said above alter that?

 

[Gordon Gekko]

Development finance is typically in the 14% to 20% range...that's what investors typically look for.

 

[iano086]

And if its a loss you both share that also.

The loss side of things isn't really on his investment horizon. He's looking for something pretty ironclad. And given the buffers involved between him and loss, that is what I can offer him.

Its not fair on him if he doesn't get some of the upside. After all with the above figures if you gave him 10% of his investment that would be €275K for him and €325 for you, hardly fair.

The fairness comes, I suppose, from how the profit is generated. Assuming it is generated, then it will rest on my/his capital inputs and on my knowledge/skill/work/taste that produces the profitable result. Since I'm not sure how to put a value on that latter element (how does one price wealth creation ability other than by the amount of wealth it creates?) I'm finding it difficult to see past other than giving an investor a return on his investment based on the risk profile/timescales involved. He would have no part to play other than his investment.


By the way: in putting together a model for return on his investment, I have already included a profit share element since the sale price of a property can fluctuate quite a bit from that projected (leaving aside fluctuations due to general market movement). As we do better than expected, that element of his increases in windfall fashion. But it was some general guidance on a low risk return I was looking for.

 

[iano086]

Development finance is typically in the 14% to 20% range...that's what investors typically look for.

Thanks. Good name that...

Would it have a similar risk profile (let's assume the one I'm involved in is all but Armageddon-proof: capital and return on investment is guaranteed) and timescale involved?

Aside from security and lock in period, are the other elements an investor would consider?

 

[iano086]

It's time for me to go to market, so, Dragons, your best and final offers would be appreciated

- assume a 100% secured (financially and legally - on both your capital and the return agreed at the outset) investment. Although relatively illiquid, the project property can be knocked down in price at any stage in it's development up to the lock in period to ensure a secured exit for the investor (in the event of my death, financial market crash, etc)

- a 9 month lock in period - assuming no need for a forced sale.

- assume a straightforward return on investment. There is a windfall element involved but I'll take account of that likelihood in my offering a fixed % return on capital

Thanks for all the inputs - it's been illuminating!

 

[Dr.Debt]

12%

 

[Steven Barrett]

I always get nervous when someone tells me it's "guaranteed", especially when it comes to investing. Makes me want to run for the hills.

If I was lending you money, I would want security on the property, first in the queue so if it all goes south, I have first dibs on the proceeds of the property. I'd still look for double digit returns, say 10%. I would have a time frame on those returns too and the longer you go over the time frame, the higher the return.

If your partner wants a share in the profits, then he has to share in the risk, so I'd take away the security on the property. You are doing the work, but nothing happens without his money. Give him 30% - 40% of profits, no security or timeframe.

Risk and return...


Steven
www.bluewaterfp.ie