Real Estate

First Rental Property: Find Investors or Go It Alone?

First Rental Property: Find Investors or Go It Alone? | Young Finances

The problem with starting any entrepreneurial venture is answering one key question “how to begin.” Often, the answer to that one enigma can be the difference between a thriving new business and failure. While putting together any successful venture is time-consuming and hard work, it is much easier put the pieces together once you know where to start. A good place to start is deciding on whether or not you want to take on investors.

Advantages of Investors

I know the first thing that comes to mind is “I can have investors? Who’d want to invest in my rental property?” and I’ll answer those questions in a bit. Regardless of whether you’ll find any investors, anyone can look for them. It’s best to first decide if you want to initiate a search. There are some good reasons to do so.

One of the biggest advantages to finding investment money is that you can reduce your risk of potential loss. Let’s say that you need $40,000 to initiate your first mortgage on a multi-family home. If your venture fails completely, you are out at least $40,000. What if investors fronted $30,000 and you put in $10,000? Your risk has reduced considerably. An influx of investment cash can also accelerate your property accumulation if you plan on scaling up a large operation.

Another important advantage is that taking on investors will allow you to draw a regular salary in addition to equity income. For example, on your own, you’ve been able to acquire three units. Your profits are your rent revenues minus your expenses. However with investors, you’ve purchased 12 units. As the company manager, you are entitled to draw a salary, usually a percentage of revenues. After you subtract your salary and other expenses from rent revenue, you receive a share of the residual profits in proportion to the size of your own investment.

If your investors have business or rental property experience, you can get free help. Investors don’t always want a passive income stream. Investors can be a great source for advice and guidance. Since they have an interest in the success of your company, they have an incentive to assist you.

Disadvantages of Investors

The advantages of taking on investors are convincing, but there are some drawbacks.

You run things, but you aren’t the boss. Regardless of how many investors buy into your company, you will always have to be attentive your investor’s questions and concerns.  If you own less than 50% of your company, then your investors have the ability to fire you as company manager.

Each investor purchases a right to profits and a say in how the company is run. A good team works together to make sound business decisions and leaves you to handle the day-to-day operations. A poor team bickers with each other and treats you like a subordinate. You need to pick your investors well.

Finding Investors

If you’ve decided to look for investors, you need to know how to find them.

Owning rental property is a great investment. You are purchasing real estate, so your investment appreciates in value and is relatively safe. Everyone needs housing, ensuring that you won’t fall short with demand.  It’s an investment that sells itself and finding investors is easier than you’d think.

There are plenty of people who want to be involved in rental property investments, but there are concerns that prevent them from doing so. They lack the time to manage a business, the knowledge to maintain properties or the funding to go it alone. Offering to be the business manager resolves these drawbacks, but you have to sell your business and your expertise.

One great way to break the ice with anyone you think could be a potential investor is to have a business plan. A business plan is like a giant research paper that explains who, where, what, when and how your rental property will operate and succeed in making a good return for investors. It takes a lot of time and effort to put one together, but once completed, you have all the details of how you plan to earn money spelled out in black and white.

Don’t just talk to family and friends about rental property. Pull from the business plan and talk about how your venture’s projected returns beat the stock market, and the investment buy- in can be a small as a single mortgage payment. Having details lets everyone know that you’ve thought out more than just what business you want to try. You’ve charted a roadmap to success.

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  • http://dollardisciple.com Dollar D @ The Dollar Disciple

    For someone’s first property, I would advise putting your own money on the line. You have to ask yourself: Would I trust me with my money? If the answer is no, then it’s likely that no one else would either.

    When you’ve got some experience and a few properties under your belt, then I think you have the credibility to attract investors.

    • http://smartfamilyfinance.com Shaun

      Good advice. No resume – no investors.

      But, what about a property manager looking to start their own real estate investments? They may not have ever owned a property, but if you have relevant experience, there is definitely a chance.

  • Kari

    Great article and things to think about. My bf and I are in the process of buying our first home, so we’re a ways away from owning multiple rental properties, but this is something we’ve thought/talked a lot about. Investors would make me a little nervous, but if we don’t have the capital to do it ourselves we’d definitely think about investors.

  • http://www.frugalconfessions.com Amanda L Grossman

    Have you ever gotten an investment partner? Just curious with your experience. I haven’t, and haven’t considered it before (though mainly because I have not had a reason to!)

    • http://www.smartfamilyfinance.com Shaun @ Smart Family Finance

      I have gone into business with a partners before. Although not yet into real estate. I’ve had good and bad experiences.

      However, I have been mulling taking on investors for real estate; hence the article. I’ve found lots of potential interest and I know there are benefits and drawbacks. One thing I’ve found, while writing out a business plan with investors is that I’d be able to scale up to the size of units I want much faster and spread out my risk of loses.

  • http://www.krantcents.com krantcents

    I would always rather go it alone. It is a rare partnership that agrees on everything. The only way to form a partnership is to find someone who has the same goals and write down everything to avoid disagreements.

  • http://smartfamilyfinance.com Shaun

    Why you should not have a partnership could definitely be it’s own post. How about something with passive investors like and LLC?

  • stoopidsuccess

    I think there are pros and cons to both sides. Personally I would for my first couple properties go at it alone, and work investors in later on other properties. I think it alleviates a lot of pressure when the only person you have at risk to satisfy or money to lose is your own.

  • Thomas – Ways to Invest Money

    I have seen both sides and been on it alone. Having a partner is great when things are going smoothly. But I dont think if its the first time for everyone getting a partner is a good idea mistake do and will happen and then the blaming will start. If the investors are going to just invest(silent partner) maybe. But rarely will people give money and not want to give there input and advice.

  • http://smartfamilyfinance.com Shaun

    Those are great reasons. I myself am torn, because I’d like to spread out the risk.

  • http://smartfamilyfinance.com Shaun

    I agree. I think having passive investors would be the way to go.

  • http://smartfamilyfinance.com Shaun

    Excellent point. Real estate is not always a passive investment. If you want to be good at it, you need it to be a business and not treat it like a stock.