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
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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.

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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.

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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 building deals with a special focus on raising money. Through his investment company, he controls over $30MM in performing multifamily assets all over the United States and has raised over $8MM. In addition to his own investing activities, he’s helped students purchase over 2,000 units valued at over $87MM. He’s the author of the best-selling book Financial Freedom With Real Estate Investing and the host of the popular Apartment Building Investing podcast Apartment Building Investing podcast.

    Joseph Furmansky
    Replied over 5 years ago
    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
    Replied over 5 years ago
    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!
    Colin Murphy
    Replied over 5 years ago
    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.
    Michael Blank
    Replied over 5 years ago
    Yup, disclosure is key …!
    Nick
    Replied over 5 years ago
    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.
    Michael Blank
    Replied over 5 years ago
    No, Nick, the acquisition fee is pure profit. The expenses you incurred during due diligence are repaid to you at closing FIRST, the acquisition fee is extra. Hope that helps!
    Nick
    Replied over 5 years ago
    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!
    Nick
    Replied over 5 years ago
    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
    Replied over 5 years ago
    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.
    Nick
    Replied over 5 years ago
    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.
    Kay Khan
    Replied over 5 years ago
    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.
    Michael Blank
    Replied over 5 years ago
    I don’t but will put it in my list of articles to write, thanks for the idea Kay!
    Kay Khan
    Replied over 5 years ago
    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.
    Al Williamson
    Replied over 5 years ago
    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.
    Michael Blank
    Replied over 5 years ago
    My pleasure, thanks for reading Al ….
    Jimmy
    Replied over 5 years ago
    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!
    Ben Leybovich
    Replied over 5 years ago
    Right on. Except make the numbers bigger Michael, otherwise you loose me man 🙂
    Ben Leybovich
    Replied over 5 years ago
    Right on. Except make the numbers bigger Michael, otherwise you loose me man 🙂 Reply Report comment
    Tara Piantanida-Kelly
    Replied over 5 years ago
    Fantastic post! Thanks for sharing such great information!
    Lisa Phillips
    Replied over 5 years ago
    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!
    Michael Blank
    Replied over 5 years ago
    Hi Lisa … pls check it out on my blog which you can get to if you click on my profile. Hope that helps. Thanks again for your interest!
    Shaun
    Replied over 5 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
    Replied over 5 years ago
    Thanks Shaun !!
    Rane Shaub Property Manager from Tacoma, Washington
    Replied over 4 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 over 4 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 over 4 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 over 4 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 over 4 years ago
    Correct!
    Tim
    Replied almost 4 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 over 2 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?