You can get paid to invest in real estate, even when you don’t have your own funds to put into the deal, let alone enough funds to close. But, let me first say that, in most cases, investors want you to have “skin in the game.” That is, they want you to have your own funds invested in the deal alongside theirs.
The reasoning here seems to be that, if the deal starts to go bad, they want to know that you won’t walk away from the deal and let it crash and burn, because your own money is involved too.
It’s always good to invest some funds in the deal for this reason. It gives investors confidence in you.
But, what do you do if you don’t have funds to put into deals? What if you have no available funds, because you are just starting out in real estate? What if all your investment funds are already tied up in other deals?
The first way to deal with this problem is to find investors who don’t mind that you cannot invest alongside them. Not every investor feels strongly about this, especially when you are starting out and you are only dealing with “family and friends” investors, who know you and trust you already.
Another way around this problem is to have partners, and make sure that at least one partner always puts some funds into every deal. I have found that, even when I have no funds available, investors are happy if they know that SOMEONE from my side is putting their own money in.
Another way to have skin in the game is to sign on the debt. In our deals, we never ask investors to sign on the mortgage. Only the sponsor team signs on the debt, meaning that we have risk and cannot walk away from the deal. In fact, abandoning the deal is one of the things that can trigger a contract provision that turns non-recourse debt into full recourse debt.
To my mind, having potential personal liability for a couple million dollars of mortgage debt is way greater an incentive to stick with a deal when it goes bad then putting in a few thousand dollars of risk money.
Finally, you have skin in the game when your incentives are aligned with your investors – when you make money only when they make money. This is a very strong incentive to stay focused on the deal no matter what. You have WORK and TIME invested in the deal, which is a greater investment than money in my book.
So, how do you structure so that your incentives are aligned, allowing you to get paid?
There are lots of ways to do this, but I will tell you how we have done it at my company, Two Bridges Asset Management.
First, when the deal closes, we charge an acquisition fee, according to a schedule. We receive this on the day of closing, and it compensates us for putting our own funds at risk of not closing to tie down the deal and for all the work of finding, financing, and closing the deal, which is substantial. We have also signed on the debt, so we are entitled to compensation for that as well.
Second, we receive an annual asset management fee, according to a set schedule. This is compensation for asset-managing the deal, which includes managing the property management company, dealing with the lender, dealing with accountants and tax preparers, and reporting to the investors.
Third, after the investors are paid their “preferred return,” then we are entitled to participate in the income profits of the deal, according to an agreed schedule.
Finally, when we sell, we pay all sale expenses, return the investors’ capital investment, pay any accumulated preferred return, and then split the profits with the investors according to a set schedule.
We employ the same fee/participation schedule regardless of whether we have personal money in the deal or not.
And that’s how you get paid as a sponsor in real estate investment deals.
What do you think? As a sponsor, should you be allowed to get paid even if you don’t have money in the deal? As an investor, would you invest in a deal in which the sponsor did not put in any of their own cash?
Please let me know in the comments.