Commercial Real Estate

How to Pay Yourself When Buying an Apartment Building with Investors

Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
126 Articles Written
get-paid-apartments

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.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

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.

Related: Case Study: How I Bought My First Apartment Building [With Pictures!]

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
  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.

Related: A Look at the Pros & Cons of Investing in Commercial Real Estate

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.

build-relationships

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!

Any questions about this process?

Be sure to leave your comments below!

Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment buildi...
Read more
    Shaun
    Replied almost 7 years ago
    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.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied almost 7 years ago
    Thanks Shaun !!
    Rane Shaub Property Manager from Tacoma, Washington
    Replied almost 6 years ago
    Hi Michael, I have a quick question about the equity in the deal. If you’re syndicating a deal and buying a $1 million building and have raised $300k from investors, but have put no money into the deal yourself, how do you own 20% of building, and therefore get 20% of the equity when you sell? Don’t you have to invest 20% of the initial $300k to have 20% equity in the deal? Or is there a way to get equity in the deal just from doing the legwork and not actually investing any money? I’m working on a deal very similar to this right now and am trying to find a way to get some equity in the deal, but don’t have the cash available to invest right now. Thank you for your help! Rane
    Rane Shaub Property Manager from Tacoma, Washington
    Replied almost 6 years ago
    Hi Michael, If you’re syndicating a deal for $1 million and raised $300k from investors, but put no money into the deal personally, how do you structure it so you end up with the 20% equity when selling the property? I’m working on a deal similar to this now where I’m putting in the work to get the deal done and using investor funds for the equity, but would like to be able to share in the equity with the hopes of adding value to the deal and eventually selling. Thank you, Rane
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied almost 6 years ago
    Rane – you get equity for putting the deal together (the “syndicator”). How much depends on the deal. You have to make sure the investors are getting the target return you are projecting. But typically I would not do a deal unless you keep at least 20% equity in the deal. Unless it’s a much bigger deal (like $3M+) where less equity is possible. I know it seems a bit odd that you’re “getting equity for nothing” but it’s really not for nothing: you’re putting the deal together. You’re making it all happen. Without you there would be no deal, and the investors would have no opportunity to make money. You deserve to be paid. Also pay yourself something at closing when you buy (1% – 3%) …. hope that helps!
    Rane Shaub Property Manager from Tacoma, Washington
    Replied almost 6 years ago
    Thanks Michael! Is the equity split something you can just write into the operating agreement for the LLC that will be purchasing the property?
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied almost 6 years ago
    Correct!
    Tim
    Replied over 5 years ago
    If you have an equity stake in a property being sold, and at closing you pay yourself a “Capital Transaction Fee”, would the fee be considered a deductible expense when calculating the 1031 boot? Are there other names for the “capital transaction fee”? I don’t see much about it anywhere else. Is this fee structure used by sellers in FSBO situations (who are not licensed brokers) to compensate themselves for managing sale of an asset with multiple equity owners?
    Christopher Grobbel Rental Property Investor from Washington, DC
    Replied almost 4 years ago
    What strategies do you recommend for negotiating an equity stake for putting together the deal? I think some investors might balk at a number like 20%. How do you frame that discussion?