Structuring deals: Equity in deal vs Percentage back

8 Replies

Hi BP,

I'm working on starting a RE company in the Philly area and have some people who are interested in investing. A big question I have is whether I should structure the deals in a way that the capital investor gets a percentage of the deal or a return on their investment. I'm sure this is more of an art than a science and some investors would prefer one over the other but i'm trying to figure out how to pitch the deals. 

My goals is to own the property in the long run, so i'm siding towards a return on investment so I can have full control in the future when I can Refi and return their investment. 

Just wondering what others have done and any insight is appreciated. 

"Stand guard at the door of your mind" -Jim Rohn

Thanks @Cody Lewis . Is that a normal "style" or way to structure deals in the market? I feel like I mostly hear of people who give up equity in deals and not so much a return on investment. If I was personally investing in a deal I would want equity in the deal but I'm sure there are others who would be more than happy to get a return on their investments, just as they would in the stock market. 

Hi Bennet, sorry I am not of help to you as I am very new to real estate investing. But I do have a question for you, what would be the difference in the capital investors profits between receiving equity in the deal or receiving return on investment? Thanks, Jacob

Hey @Jacob Davis ,

This is just my thought process and would love any input. How I would structure it would be, that if an investor is getting a Percentage return they would get a preferred return, meaning they would get their return before the business does. I would also possibly give a higher return and knowing that it won't go up and down based on the cash flow of the property, means i'll have more of an idea how much money i'll need. If it was an equity partnership, I would have my pro-forma returns pre and post the value-add. So some months the return might be lower and some months higher, depending on where we stand with turned apartments. The advantage in the percentage model is that I know how much money I need to come up with and once I refinance I can give the investor back their capital and own the property outright (which is my main goal). The advantage with the equity side, would be that I might not need to come up with cash throughout the process and is less risky for me since they know there will be some months cash flowing more than others, but once I refinance out the investor would still have a percentage in the building moving forward.

Make sense? 

Hi @Bennett Schwartz . I recommend you study several PPMs by experienced syndicators.  The most well known syndicator who does the structure you want is Ken McElroy.  You may want to check out how he does it. He apparently gives the investors a preferred return, then a split above that. Then he eventually refinances the property and uses those funds to buy out investors from what I understand.  Then he owns the asset entirely. 

Best of luck!  

Thank you @Paul Moore , that sounds like a plan. I appreciate you letting me know that Ken does it.I'll look into that. Also, i'm a big fan of your videos so it means a lot for you to reach out. Really really appreciated.