PRIVATE MONEY IN PHOENIX MEANS 3 DIFFERENT THINGS
Private money” now describes at least three different deals in Phoenix, and the operators who mix them up are making promises they do not realize they made.
FROM DEVON’S DESK
Recently I wrote about Phoenix flippers and developers bringing private capital into their projects. This week I want to clean up the words, because the words decide what you owe.
Private capital is the umbrella. Money from private individuals or companies can fund your project through debt, equity, or both.
Private lending is debt. You borrow money and agree to repay it with interest under defined terms. The loan documents, the lender’s lien position, and the collateral decide how it works. Private lenders can lend in first or second position depending on the deal. This is our lane at 42 Solutions: direct decisions, speed, and flexibility on structure.
Private equity is a share of the deal. Investors put money in and take part in the economics: a share of profits, a preferred return, or both. They might come in as limited partners or through another ownership structure. They do not get “paid back” like a lender. They get paid out of what the deal earns.
Same umbrella. Very different promises.
THE MATH THAT ACTUALLY MATTERS TO YOU
Say your project is projected to make $200,000 and needs $400,000 of capital.
Debt: a $400,000 loan at 12% for six months, plus one point, costs about $28,000. That number does not move. It is $28,000 whether the deal makes $100,000 or $300,000.
Equity: now say an investor funds that same $400,000 for 40% of the profit. Their share moves with the deal.
Profit comes in at $100,000: they get $40,000.
Profit comes in at $200,000: they get $80,000.
Profit comes in at $300,000: they get $120,000.
Debt is a fixed cost you owe even when the deal disappoints. Equity shares the disappointment, and it takes a bigger piece of everything you do right.
Debt has a price. Equity takes a share of your upside.
Neither one is better. They are different tools for different parts of the deal. The strongest operators I lend to use both on purpose: a lender carries the bulk of the project, and investors fill the gap where it makes sense. They know exactly what each dollar costs before they take it.
Planning your next project’s capital stack? Send me the deal and I will show you how much of it our loan can carry, so you only bring in equity where you actually need it. → https://portal.weare42solutions.com/portal
IF YOU ADVERTISE A NUMBER, DEFINE IT
I am seeing more Phoenix developers pitch investors “20% over about 18 months.” It might be a great deal. But your investors are going to ask what that number means, and you should have the answer ready before you post it:
Is 20% the total return, or per year? 20% total over 18 months is about 13% a year. 20% per year over 18 months is about 30% total. Those are very different promises.
Is it projected, preferred, or interest on a loan? A projection is a hope. A preferred return is a place in line. Interest on a loan is a contractual obligation.
What has to happen for them to get paid? A sale? A refinance? By what date?
Where do they sit? Behind your lender, and next to or behind any other investors.
The same goes for profit splits. Offering investors 40% of the profits is not the same as offering them 40% on their money, and anyone who reads it that way will be disappointed later.
ONE THING TO STEAL: the one-page capital stack
Before you take a dollar from anyone, put every source of money for the project on one page:
Who is in: lender, second lender, investors, you.
What each one gets: interest, preferred return, profit share.
The order they get paid in when the house sells.
When they expect to be paid: the date, not “when it sells.”
What happens if the project runs 90 days long: who is still accruing, and what that costs you.
If you can fill it out in ten minutes, you understand your deal. Hand it to your lender and your investors and everyone is working from the same page. If you cannot fill it out, you are not ready to raise yet.
If you flip or build: use debt and equity on purpose, and know what each one costs in a bad outcome, not just a good one.
If you are an agent: if you help an operator raise from investors, make sure everyone is clear on whether it is a loan or an ownership stake, and know the rules for raising capital before you ask anyone to invest.
If you are in title or escrow: you see the whole stack at closing, and the clean files are the ones where every lender and investor knew about each other from day one.
If you are a contractor or sub: ask how the next job is funded. A clear stack is a draw schedule that holds.
One question I would actually like answered: on your next project, how much of it is debt, how much is equity, and does everyone in the deal know the answer?
Reply to this email, submit at weare42solutions.com, or call or text 602-501-1174. We lend our own money, so when we say yes, we close.
P.S. Debt has a price. Equity takes a share of your upside. Know which one you are taking before you take it. Send your next deal → https://portal.weare42solutions.com/portal Know an operator raising from investors right now? Forward this to them.
Newsletter Edition #40
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