Trying to grow to raising capital for multifamilies

Multi-Family and Apartment Investing
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Trying to grow to raising capital for multifamilies

Dave Carter
Rental Property Investor · Springfield, IL · Member since 2020 · 36 posts · 35 votes

I’ve got 3 SFHs and one four plex. I’m tapped out of down payment money so I’m looking over the horizon to figure out how to raise capital from investors but feel a little stuck.

I don’t want to give up equity (I don’t want to bring on an LP and own 50% of a four plex when I could have just bought a duplex on my own)

If I’m paying 8-10% on a down payment loan for a few years I have a hard time making the numbers work.

My thought is borrowing the DP, upgrading the units as needed, raising rents, and refinancing in 2-3 years, pulling out cash to repay the loan.

What’s the best way to make this situation work? I hear often “you can structure it any way you want” but I can’t exactly figure out how to give a worthwhile return without spending all of the profits on interest. Would an investor typically be ok putting up 25% of the cash (bank financing for the rest) to own 25% of the building?

I’m hoping to use the stack method and get into the 6-12 unit arena but am not sure what kind of deal to pitch other investors on. Any advice is appreciated.

I’ve listened to Multifamily Millionaire numerous times, as well as most of the BP books. I’m not quite trying to reach for syndication level, but just my next small steps. Thanks!

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Spencer Gray
Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes
4y

You can do it "anyway you want" but there's no reason to re-invest the wheel. There's a reason that most real estate partnerships and syndications look relatively similar, with the differences typically being the economics and control.

You'll first need to decide whether you are looking to raise debt or equity. Debt is usually used for smaller properties with the investor/lender being in the first position, essentially acting as the bank. Almost no lenders will allow you to use debt for your downpayment. Debt from individuals is typically harder to raise unless you offer a very high interest rate, higher than a bank would offer. Think hard money loans. 

Most RE investors are equity investors as they want to participate in the upside. The cost of capital is higher, but there is no obligation to repay if a total loss occurs, unlike a loan where you would still be on the hook assuming it's a recourse loan. 

Here is the "typical" structure that can be used from small and large deals alike. I know you said you aren't trying to reach for syndication, but this can be used with just a single, or several investors. 

Investors (Members) receive a 6-8% annual preferred return on their invested capital.

Proceeds in excess of the preferred return is split 70/30 (LP/GP) based upon Members capital contributions.

At the time of sale or capital event, all capital is first returned to contributing members, excess proceeds are split 70/30 (LP/GP). 

It's also typical to charge an acquisition fee (.75-2% of purchase price) as well as an asset management fee (.5-2% of effective gross income). 

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  • Spencer Gray
    Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes
    4y

    You can do it "anyway you want" but there's no reason to re-invest the wheel. There's a reason that most real estate partnerships and syndications look relatively similar, with the differences typically being the economics and control.

    You'll first need to decide whether you are looking to raise debt or equity. Debt is usually used for smaller properties with the investor/lender being in the first position, essentially acting as the bank. Almost no lenders will allow you to use debt for your downpayment. Debt from individuals is typically harder to raise unless you offer a very high interest rate, higher than a bank would offer. Think hard money loans. 

    Most RE investors are equity investors as they want to participate in the upside. The cost of capital is higher, but there is no obligation to repay if a total loss occurs, unlike a loan where you would still be on the hook assuming it's a recourse loan. 

    Here is the "typical" structure that can be used from small and large deals alike. I know you said you aren't trying to reach for syndication, but this can be used with just a single, or several investors. 

    Investors (Members) receive a 6-8% annual preferred return on their invested capital.

    Proceeds in excess of the preferred return is split 70/30 (LP/GP) based upon Members capital contributions.

    At the time of sale or capital event, all capital is first returned to contributing members, excess proceeds are split 70/30 (LP/GP). 

    It's also typical to charge an acquisition fee (.75-2% of purchase price) as well as an asset management fee (.5-2% of effective gross income). 

    3Reply
  • Dave Carter
    OP
    Rental Property Investor · Springfield, IL · Member since 2020 · 36 posts · 35 votes
    4y

    @Spencer Gray

    I guess you’re right. While I say I’m not swinging for the fence on large syndication, I’m still operating in a syndication fashion. I think what you laid is what i’m looking for. Thanks for the advice!

    0Reply
  • Brian Briscoe
    Real Estate Coach · Salt Lake City, UT · Member since 2017 · 273 posts · 414 votes
    4y

    @Dave Carter

    For smaller deals, a joint-venture or partnership structure are more common than syndication. When you do, it doesn't make as much sense to charge the fees that normal syndicators do if you're partnering with 2-3 other individuals. You're also not likely to have to incorporate a preferred return to your partners either.

    Sweat equity is typically worth about 25% of the equity in syndications, but when you add the fees up (3% acquisition, 2% asset management, disposition fee, etc), the relative percentage that goes to the GP (sweat equity guys) is higher. If you're also contributing capital (like the equivalent to your down payment on a duplex), you can justify a higher percentage ownership in that small property.

    Looking at a 4-plex v. a duplex, the juice may not be worth the squeeze, but if you set your sights a little higher, I'd say 25% of a 12-plex is much better than all of a duplex... 

    1Reply
  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    4y

    @Dave Carter, if you want a very convoluted structure, call your "debt" preferred equity.  You will pay more for the capital in terms of pref, but can give up a smaller equity slice.  Something like 10% pref with a 5/95 split over the pref, so you are still keeping 95% of the deal.  

    The issue here is you are starting to issue securities, so your formation costs will likely be somewhat higher than a typical JV. This is why most true syndications with passive investors are large deals, since a $15,000 formation bill is not much when raising $3-5mm but when raising $300k, it is a significant expense.

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