How to Pay Yourself When Buying an Apartment Building with Investors

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When I bought my 12-unit apartment building (read the entire gut-wrenching discourse here), I put the entire deal together with a handful of investors.

In fact, I ended up not putting any of my own money into the deal and got paid $15,000 at closing.

Let’s talk about how to pay yourself when doing deals, especially when you have other investors involved.

Getting Started

When you’re putting together a deal to buy an apartment building with investors, you’re doing a lot of hard work: chances are, by the time you have a building under contract, you’ve looked at many others.

You negotiated the deal and did the due diligence. You brought the investors together to raise the equity and you secured financing for the rest. You’re doing all the work to raise the value of the building, and then you try to sell or re-finance for maximum profit.

You’re adding value to your investors, and you’re doing all the work. Many people who go through the trouble of syndicating a deal don’t compensate themselves appropriately, when in fact it’s perfectly reasonable to do so.

There are three ways you can pay yourself when syndicating an apartment building deal:

  1. Upfront at closing;
  2. While you own the asset; and
  3. When you dispose of the asset.

Getting Paid When you Purchase the Building

If the deal allows it, pay yourself an acquisition fee at closing. How much? Whatever the deal allows and whatever seems reasonable to you and your investors. The broker gets paid 3% – 6% of the purchase price. Wouldn’t it be reasonable to pay yourself 3% for putting the deal together?

Say you’re buying a building for $1M. A 3% acquisition fee would be $30,000 … not a bad pay day, right?

Paying yourself an acquisition fee increases the overall cash required to close. This of course reduces your investor’s returns. You need to work the acquisition fee into your projections and see if you can still achieve your desired returns for the investors.

In general, you should try to pay yourself something at closing. Shoot for 1%-3% if possible. If the deal doesn’t allow for it, either don’t pay yourself or find another deal!

Getting Paid While You Own the Building

There are two ways you can pay yourself while you own the building.

The most obvious one is cash flow distributions. You should retain at least 20% equity in the property for being the managing member (with your investors getting at most 80% for putting up the cash). This will then entitle you to at least 20% of any cash flow distributions and profits from appreciation.

The other way is to pay yourself an “asset management fee”. This concept is borrowed from money managers who are paid a small percent (1-2%) of the assets they manage. You, too, could pay yourself 1% of the total cash invested. This would be paid out before any kind of preferred rate of return distributions for your investors.

In our example of a $1M building, let’s say you raised $300,000 of equity and cash to purchase the building. A 2% asset management fee would be $6,000 per year, or $500 per month while you own the building.

Getting Paid When You Sell the Building

When you sell the building, you need to pay closing costs and sales commissions. You need to repay the outstanding loan and the initial investment to the investors. Whatever is left over is called the “Net Proceeds from Sale”.

If you own 20% of the building, you are then entitled to 20% of the Net Proceeds. That’s one way you get paid at closing.

You can also pay yourself a “Capital Transaction Fee”. This would be a small amount (1% – 2%) of the sales price that would be paid to you at closing.

If you sold the building for $1.5M, a 2% fee is another $30,000.

Keep your Investors in Mind

Regardless of how you decide to pay yourself, make sure you disclose how you’re compensated to the investors up front. This is usually done in the LLC operating agreement and/or the Private Placement Memorandum (if you have one).

Also make sure that your compensation is reasonable and that your investors achieve their projected rates of return. If you are the only one being paid and the investors are not, it will leave a sour taste in their mouths and they’re not likely to invest with you again.

Conclusion

You are providing real value to your investors and are doing all the work, so don’t be afraid to compensate yourself reasonably when you buy the building, while you own it, and when you dispose of it.

In our $1M apartment building example, you paid yourself $30,000 upfront, $500 per month while you own it, and another $30,000 when you sell it. Plus you’re getting 20% of any profits.

Then do another deal!
Photo Credit: Gianni Dominici

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About Author

Michael Blank’s passion is being an entrepreneur and helping others become (better) entrepreneurs. His focus is buying apartment buildings by raising money from private individuals. He’s been investing in residential and multifamily real estate since 2005. He is the creator of the Syndicated Deal Analyzer and the eBook "The Secret to Raising Money to Buy Your First Apartment Building".

20 Comments

  1. Joseph Furmansky on

    I understand that everything is subject to negotiation, however, are the above methods of paying yourself aside from a “management fee” (i.e. 10% of rent roll), if you are managing the property, or would you forego the management fee if you are collecting money while you own the building?

    • Michael Blank

      If you’re also doing the property management (which is above and beyond “normal” syndication) then, yes, you would pay yourself the customary property management fee of 5%-10% of income!

  2. I enjoyed reading that Michael – very clear and succinct. In my experience, most experienced investors would be absolutely fine with these types of fees as long as they were clearly explained at the beginning of the process and the bottom line numbers made sense.

  3. Great post and keep them coming! :)

    One point/question, even though you get the acquisition fee (your case 30k) all of that money isn’t profit for you though right? I mean as you are putting the deal together you are coming out of pocket for things like attorney fees, travel fees (if your property isn’t local) due diligence fees, etc right? While the acquisition fee should be more than what you spent to put the deal together, you still have to subtract those expenses from the initial number don’t you?

    Just want to make sure I”m understanding this correctly.

      • WOW! Thanks for clearing that up! That makes a huge difference. That leads me to another question, with the expenses like I mentioned above, you are allowed to not pay them completely until closing? An inspector, CPA, attorney, etc allows you to do that? I know in your eBook you talked about an attorney allowing you to split the payment with half of the fees being payed at closing but I just assumed with the rest of the initial expenses you had to come out of pocket for.

        Thanks for the help and great book too btw!

        • Woops, I see that you put “repaid”. So it sounds like you do still come out of pocket for some things in the beginning.

        • Michael Blank

          You do have out of pocket expenses during due diligence, but you want to minimize and defer those as long as possible so that you’re more and more sure that you will close on the deal. This is the # 1 risk when putting a property under contract. You can put a bunch of exit clauses into the contract, but you get to a point where you will need to spend some money. By that point you should be 90% sure you can close on the property, but there’s always that slight chance that you can’t close. So you will need some money to fund the due diligence phase, and if you don’t have it then you can involve an investor and give them some equity etc in return for taking on the additional risk.

  4. I always enjoy your informative and educational articles. I am a newbie and came to BP to educate myself. How do you find these deals ? do you have an article on this subject?
    Thanks.

  5. Michael,
    Thank you for nicely breaking out fee structures and rationale. This is some good stuff you shared. I appreciate the hard work you put in to make the concept simple for us to understand.

  6. I love this!

    I get asked constantly to “partner” up on deals, i.e. “I do the work”

    This system would let me participate in both the upside and get me cash for doing the work.

    This is by far my favorite post this year!

  7. Thanks! I am getting such a better idea of this, and clear and easy to understand articles like this make it easier to learn and focus. Thank you! What’s your ebook about? If its all about structuring deals, sign me up!

  8. I’ll echo others in thanking you for another good article breaking things down in easy to follow bits.
    You are doing a great job of explaining and Demystifying the subject to a lot of us.

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