A couple things to avoid. A couple of things to avoid is, number one, not to overinflate your return on investment.
What ends up happening is, some people, they want a 6% return. I actually have a couple of passive investors that invest in my company. They just say, “Hey, Adam, I don’t have a $50,000 amount for your next deal which I think is your minimum. But I’d love to invest somehow. What can I do?”
And I always say, (if I know them, right?) “If you want to invest in the company I can give you a reasonable rate. It’s not going to be attached to a property. But I can show you the money that I’ve made over the last little while and I can show you that I have the competency and the ability to pay you back, if you’d like to”. And they always… often say, “That sounds great. I’d love to be a part of that.”
And then they say, “What interest rate will you pay?” And I say, “I’m open minded. I want to make sure that it’s fair for you. I know that the stock market is not doing so hot right now. And I know that that mortgage rates are in the twos and threes right now. So whatever you think is fair.”
So this is like a trick for other people that are listening. You start by saying stocks aren’t doing great and… (if they’re not, don’t lie and say they’re not if they are doing great) but when they’re not, you just say “It looks like stocks are not doing so well right now and interest rates are at an all time low, 2 to 3%. You just tell me what you think is fair And and if I can do it, I will.”
And, you know, it’s really interesting. I’ve been getting 5 or 6% pretty often. And so if you do this when you’re talking to people and and you say, “Yes, I can do like a 6% preferred return” or “Great! I’m glad that you’re at that 6%. We we actually are offering an 8% preferred return.”
If you go straight to the to the actual like 19% that you’re thinking of, they’re going to they’re going to be like, “Nope, nope, too risky.” And again, when they go to their spouse, they’re going to basically be unable to invest in your deal.
So that’s just a hack. I always ask them what they want. And then, if they’re asking for lower amounts, I don’t even talk about the whole IRR.
Actually, I don’t say IRR at all. I don’t even talk about the whole annualized return. I really just talk about, “Great, you said 6%. That’s great because we actually have a 6% preferred return. Let me show you what that means. This just means it’s not a guaranteed 100% guaranteed return or anything like that. It just means that if we make enough money in the deal during that quarter, we’re going to give you the first 6% and then we’ll split the rest.”
And I say, “We usually make more than that. And so we’re usually just fine, but you will get the first 6%. And if if we’re unable to pay it that quarter, but we can the next quarter, we actually catch you up. So that’s what a preferred return means.” And I just kind of go through that.
And all I talk about is a preferred return. I’m not trying to go to the 19-20% IRR or 16% IRR that everybody’s talking about, because if they’re asking for six, that’s going to scare them.