Awesome story and congrats on the deal!!! I'm new to the BP community, but have already learned a lot, just from reading the forums and posts. Once again, congrats and thank you for sharing and being so transparent.
Oscar Alvarado, in far west Texas :-)
Always thinking like a small investor, I know you have a different mindset altogether. I did not think the place you bought was so distressed there would be that much room for rent increases that would create a plan B. I guess large complexes in good areas can be mismanaged as well.
I have a friend just like you, who went from buying flips to moving up to 32 units at a time and then to a shopping center. Along the way I know he had a lot of angst and almost invoked plan B (bankruptcy). The last insane run up allowed him to sell to someone with deep pockets who funded his original plan A exit of selling all.
After resting as one of the top RE agents in my area, he just bought a college rental, I guess it just is in his blood.
Brian if you sell in 5 years would you receive any of the proceeds from the sale since you didn't put any money in it?
Hey @Dennis Treacy . This complex isn't distressed, as Brian has mentioned previously. The value add is via rent growth. Houston, along with some other large markets, are in for a perfect storm of low vacancies/high demand, which will increase rents, which leads to increased value. There's a lot of building going on in Houston right now to meet demand.
@Mitchell M. : Brian made reference in an earlier post to sharing cash flow with his investors after an 8% return on capital for them was achieved, and I recall his share was 30%.
@Brian Burke , does the same ratio hold upon sale? Also, could you share generally how you negotiate these with investors, and what factors come into play?
What was I thinking? I have two customers who have had enough of regulation, taxes and unions and other issues concerning their businesses in PA, both have moved to Texas somewhere.
I will assume they found the least taxed and regulated area to set up shop.
Why Texas chose to join the USA in first place is a mystery to me.
@Jim Farrell , yes the profit split structure is all-inclusive. It includes periodic cash flow and gain on sale. Most of what I will receive will come from the gain on the sale, the investors get most of the cash flow by virtue of the 8% hurdle. In years 4 & 5 I might expect to see some excess cash flow where it would exceed the hurdle (and all accumulation from years that it fell below the hurdle).
As to your question on negotiating with my investors, the answer is simple. I don't. I model the acquisition and the investment structure in a way where the forecasted return meets the expectations of the market (by "market" I mean investor appetite). Some investors will want in, others will not. If I were to negotiate, I'd have as many different deal terms as I do investors, and that doesn't work. And to try to put them in a room and negotiate with them as a group? Disaster! Instead, you just have to know your audience and provide something that people want.
Hi Brian, I've read through most of the thread and again it's really awesome info. I think I may have missed but what type of setup do you have? 504, REIT? Also how do you deal with the taxes. Thanks Rocco
Always good to hear a fellow Californian doing well in Houston. Our 60 unit should be closing in October. Would love to see your property on our next trip down there.
Brian, congrats on your new deal.
A previous poster mentioned the $45k per door and 10 cap which was quoted as the all-in (including repairs). I just wanted to point out that the all-in is what matters so yes, you paid $45k per door which is apparently on the high end of the C class for that area, but as you pointed out, it is a stabilized operation at 92% occupancy with very little differed maintenance. Getting this at a 10 cap is a great deal, regardless of the one comment that you should expect 15 caps. Talk is cheap in my book.
Give me a heads up on your next deal you are looking at, I am interested.
@Roc P. this was a private placement exempt from registration under Reg D rule 506. The entity is a limited partnership so all taxes flow through the entity and are reported on everyone's personal 1040. Everyone receives a K-1 containing the needed information for tax reporting.
@Will Barnard yes, absolutely true that all that really matters is the all-in price. I know that you know this but for the benefit of those that do not, it is important to distinguish that there is a difference between all-in capital and all-in basis. In most cases all-in capital will exceed basis because you need to have capital for reserves, utility deposits, etc that are either retained or refundable (meaning that in this deal all-in basis is still lower than $45K/door). I'm glad you brought this up though, because I don't think I explained that very well previously.
oh now that's just wrong! Actually I guess it's only fair since so many here have been buying poorly run properties from California owners. It seems many long distance owners are not quite the professional, diligent buyers/operators that you are.
I'm looking at a 104 unit this week that I think is way overpriced, but I've also been told they'll probably get their price. Ill let you know where they're from!
Brian, again this is one of the best threads. I think investors, myself included, sometimes get stuck on the little deals, where as if you can do one big deal with using OPM, you have a grand slam.
Is there any chance of a case study for this property or something similar. Thanks Rocco
I just want to congratulate you for this great accomplishment and a great lesson for all of us in this wonderful community of investors. I had read before about the PPM and the 506d vehicle in Ken McElroy book The Advance Guide of Real Estate Investing, but the way you did it was absolutely remarkable. If you don't mind it, let me ask you a couple of questions about the deal structure:
1. Did you use a Broker dealer or Financial Advisor to put in the market the offering and help you to find qualified investors in a short period of time?
2. I have read from McElroy's book that the investors receive ownership interest in the LLC according to their equity contribution. What mechanism you used to calculate how much interest are you going to give to each investor according to their contribution?
3. How you maintain control over all the decision making while you could end up giving away the majority interest to your investors? It is through a GP entity that you control? Does the GP retain majority interest in the LLC as well?
Thanks in advance for your valuable feedback on this and congratulations again for such a great deal.
1. I did not. All of the investors in this opportunity are either in other deals with me or heard about me from people in my other deals, read a news article about my company, or found me thorough some other type of networking.
2. In an LLC, you can use special allocations to distribute profits however you want, it isn't like stock ownership where the amount of owned stock dictates percentage. The structure between sponsor and investors is laid out in the LLC operating agreement. Figuring out the ownership percentage of each investor as it relates to all investors as a whole is simple, just divide capital invested by each investor by the total capital invested by all.
3. The LLC operating agreement specifies what the GP is allowed to do, and what must require a vote of the membership. People invest with me because of my track record, so it is actually preferable for the GP have as much control of the operations as possible. The investors would rather rely on me, who they know, versus relying on the decision making ability of fellow investors that they don't know. That doesn't mean that I get to do whatever I want, though. Certain major decisions that deviate from the original plan would require a vote of the membership, which is just good business.
Note to self: sell more insurance in Texas. The wind premiums in coastal Texas are insane. $321 a door for insurance is very steep compared to the rest of the country.
@Joe Bertolino yes, I agree completely! The insurance is very high. Harris County is worse than Montgomery County so we saved a little there, but Dallas & Austin are somewhat less. Still high compared to many other areas though.
Perhaps you do not want to state numbers, so what percentage return on what you have invested do you plan to have made at year 5?
@Stephen Masek if my projections (which are pretty conservative) are met and not exceeded, I expect that the investors will see an IRR in the mid-to-high teens. Of course, if those projections are not met (which is always possible) the IRR would be less, and vice versa.
Brian, thank you very much for the quick response, it was a very valuable information. Btw, I just listened podcast #3 yesterday and I found your story very inspiring and remarkable. Like @Brandon Turner commented on the show, I see you and I want to be like you some day. Keep up the great work!
Hey @Brian Burke ,
Well done! Houston is a great market to be in. Do you also get the benefit of carried interest, or is it strictly 70%/30% above 8% preferred, plus asset management fees? Thanks.
Hi @Paul Khazansky , I agree it's a great market. My carried interest is limited to 30% of the profits after the investor receives 8%. In addition to the carried interest, there are asset management, acquisition, and disposition fees. The bulk of the sponsor compensation will be realized via the profit split.
I wanted to congratulate you a while ago, but this thread for buried way down there. Congrats on another great deal. Thanks for sharing this thread with us.
Wow, what an accomplishment. Thanks for posting it, Brian!
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