Investment question?

Question

I'm a plumbing contractor, and I'd like to build a spec house for resale. Am I allowed to form an LLC, ask friends and other trades for money and pay back a guarantee rate so I can generate CASH.
Example: say I ask for someone to Invest in me for $5000, and guarantee a 6.25% return in 12 months. This way I generate CASH, pay less in interest on a construction loan, and pay a better return than 12 months CD?
For the people who invested? Starting from the first day of construction if the house hasnt sold, I will then get a loan needed and pay off the debt. It's all on me to get this house sold within that 12 months.

I know right now I can get say 25 people to invest $5K and at 6.25%. In return each would get $312.50 return. This is higher than a savings, a CD....What kills individuals & builders is interest. When you're a builder the interest to build is just passed along to the buyer. I want to prevent that and try an jump start the new housing market. Built by the trades

Answer 1

Theoretically it works but 6.25% in my opinion is not an adequate return for the risk your investors are assuming....don't use the word "guaranteed"...you're offering them a fixed rate of return but not a guaranteed return because the return is subject to uknown variables. I would question whether or not you could raise the funds you stated by providing such a low risk adjusted return. Why wold someone invest in your project at 6.25% when 1 year CD rates which are "guaranteed" are paying 5% (the actual monetary difference to your investors who put in $5k is only $112 more in your project than what they would get in a CD....I don't think that's going to fly) What if you have cost overruns and the project is not able to return the full amount of interest you "guaranteed"...or worse yet what if the housing market plummets and your have to sell at a loss and return less than the principal amount to your investors?....what if the house doesn't sell and you can't get financing from a bank to return funds to the intitial investors at the end of one year because banks are tightening their lending standards?...I think you need to rethink this with a higher cost of equity.

(I don't want to discourage you from going forward as I think its' a great thing what your are trying to do....I just think you will find that you need to increase your cost of equity....do a spreadsheet with various cost of equity rates and find your expected break even point with various cost assumptions, liquidation values etc.....worse case, best case etc....good luck)

Answer 2

I agree with the points that SmittyJ brought up.

But I also believe that the cash you need can be raised from investors if you draw up a contract stating that once the house is sold to a buyer that YOU will be liable to returning their initial investment to them in addition to an agreed-upon percentage interest. You will be liable for this amount regardless of whether building costs go over budget. I would stipulate that you have a certain amount of time after the house is completed to sell it for profit, so the investors do not get antsy and hound you for their capital and interest. I would offer up to 10% interest on their investment upon a sale for profit. If costs go over budget YOU are liable for the extra costs to complete the project, NOT your investors.

If the house cannot be sold during the building phase, it can likely be sold after completion for a profit. People are more likely to buy a house they can see completed, rather than simply viewing building plans that they themselves did not design.

If the house is of a good design with common amenities in a preferred location, you should not have a problem selling the house at a profit level that allows you to cover your investors, and you should make a nice profit yourself as well as be able to pay off any additional loans you take out if the project runs over budget.

I've seen people successfully do this before, so it can work if planned properly.

Answer 3

What if the market changes and you can't sell the house or get a real loan, what happens to the investors???

I think I will stay with an investment with a better, safer, track record.