4 Ways Make Money on Someone Else’s Airbnb Investment
by Rachel Prince, Airbnb Real Estate Investing Educator
There is a lid for every pot. Just like each investor, whether a private investor, a friend or family member, or a private money lender, will have specific requirements for how they want you to put their money to work and pay them back. Furthermore, its up to you to understand how to structure your deals so that you get what you want out of it too. I believe being able to articulate a clear vision for how well you can leverage an investors cash on their behalf, is one of the first steps to attracting in a strong investor pool. Knowing what you will and will not settle for, plus what reasonable industry standards are, versus what is simply greedy, will push out those who are not serious or those who you don’t want to work with in the first place. Here are the 4 main basic areas that can help you structure your payments on deals.
1. Success Fee/Acquisition Fee: “SECURE & LOCK-UP”
Your “Success Fee,” is the fee for your time and effort to put together deals, after success and paid at closing. Your duties can also include researching properties, setting up LLC’s and/or Land Trusts, and locking up deals / getting them under contract and being the point person to acquire the asset(s). As with some investors, you may need to find the property first, show them the proforma each time and in some cases, get the home under contract. Always negotiate your Success Fee before you lock it up with them. You will generally be paid out at the closing day of the property. You may also be able to secure an upfront “Acquisition Fee”, whereby you are paid something upfront by the fund or investor to lock-in your services and pay for your role to set-up and manage the und/asset.
2. Real Estate Commission: “MAXIMIZE YOUR SALARY”
If you want to specialize in a certain area or city, it may be worth your while to get your real estate license. Not only will learning how to Broker deals assist you with your investment knowledge and proficiency, it will improve your ability to quickly lock up deals and also earn the transaction commission. Additionally, if you are a broker you will be able to secure a referral fees as per NAR, the National Association of Real Estate Brokers. Referral fees vary and are generally 25% of the buyers commission although this fee may be structured and negotiated with the other broker before the purchase contract is signed. Also, if you are turning around and flipping the house immediately or selling the house down the road, you can also have it in your agreement to list the home and get paid the broker’s seller’s commission.
3. Management Role: “AIRBNB INCOME or LONG TERM”
Your position managing the properties whether Airbnb or Long term renters, is vital to the continued success of the investment. You can include a 20-30% property management fee short-term rentals. You can also include an optional set-up fee to furnish, set-up listing, etc.
4. Partner Return Rates – “NEGOTIATE WITH FAIRNESS NOT GREED”
The Partner Return Rates or IRR takes into consideration total cash, and total equity at the close of the fund. The cycle of the fund can vary on a real estate deal from months for “flips” and years for “buy and holds”. Depending on your investor portfolio set-up your return or payout comes typically after the investor is paid out aka, Preferred Rate of Return or Hurdle Rate. This can be anywhere from 10-14%. The investor may also have an annual return or payout for cash flow distributions during the term of the fund.
1. Preferred Rate: = 12%
2. Projected IRR = 18%
3. Partner Split 75/25
1. Investor gets 100% capital back.
2. Investor gets Preferred of 12% capital back
3. Investor gets Preferred 12% Annual Return of Remaining Profit
4. Investor Gets 75% (This extra split on profit is how we got the initial 18% IRR. Sponsor (YOU) get 25%
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