How do my investors make their money back?

6 Replies

I'm looking at purchasing a commercial building and I'm a little confused on how and what ways investors will actually make their money back if they invest with me. The seller is willing to seller finance the down payment and the bank is ok with them doing that so I've already secured the financing. But I have some Investors who want to invest with me but I don't quite understand how I am supposed to pay them back. do I just refinance after a few years and get them their money back? do I just give them some of the cash flow? if I have the financing secure how much of the ownership of the building do I give to investors and then do they just get that much of the cashflow? I'm trying to find good resources for figuring out how to repay investors in the deal. Any help would be amazing! Thank you in advance!

Most people need investors to put together the down payment. Sounds like you're doing 100% leverage, so why are you needing investors? For the rehab dollars? Normally you would pay investors from cash flow and the appreciation as you improve the property. But with such a high leverage I can't imagine you are cash flowing much at all so there might be nothing to share. If you can increase the value of the property a lot then you can refinance and pay them from that.

@Michael Le Well with the one Commercial Building I am specifically looking at that I mentioned above. Although the seller is willing to finance the down payment between, that payment and the bank financed mortgage I would be a null cashflow after I set aside Cap Ex, Vacancies, Repairs. So in order to make a good deal great I was thinking of trying to bring in investors and give them 80% of the cash flow as their pay back and then I would at least be able to get 20% of what ever cash flow would be there. Which is better than just owning the building and no cash flow right? But then am I supposed to refinance after a while and give them their original investment back along with a reduced percentage of income? I'm still trying to figure out how they would get their original money back and then how to factor that into running the numbers.

If you're a zero cashflow, what is their 80% of that worth? And I'm still not clear on why you're looking to bring on investors. If you're able to buy this property with no money down then just enjoy the equity build as your tenants pay off the property. You won't make any money in cash flow right now but assuming you can improve operations you'll be able to refinance eventually and get your money. And it didn't cost you anything.

@Frank Geiger @Michael Le

Well if I bring in investors then instead of having the sellers finance the down payment then the 20-30% of the equity of the property won’t have a loan with a payment on it so I’d have some cash flow. Depending on how much money I brought in. Then the cash flow that would’ve went to pay the seller financed down payment would then be divided 80/20.

Hi Chris.  It is always smart to bring in cash equity to reduce your leverage on a deal.  Many smart real estate investors I know that have been around for the long term never like leveraging their properties more than 70%.  Moving on.  The way our firm does does our splits with our LP investors is as follows: 70% LP/30% GP, 1% asset management fee to us the GP & a 7% cumulative pref to the LPs.  Refinance events are split the same way with a reduction of their capital account which reduces their pref basis.  

Hope this helps.