How to secure Investor for Apartment Deal

Question

I have been in real estate property management for over 8 years, am starting a management company, and am looking to secure investors for my first apartment complex deal.

My question is, how can I go about getting an investor for a deal when I have little to no cash to contribute myself?

If they put up all the cash, am I simply the property management company or is that negotiable?

If cash is needed, is it possible to get a different investor or even the same investor to invest solely in my management company to secure Owner/Operator status?

Any advice is greatly appreciated.

Michael Blank · Answer

@Rusty Knowles I've written quite about on the BP blog about the topic of raising money. Here are some posts you might find helpful:

A Step-by-Step Guide to Ace Your First Investor Meeting

How to Structure Syndicated Investor Deals: What Investors Are Looking For

How To Be Taken Seriously as an Up-and-Coming Real Estate Syndicator

Syndicated Apartment Building Deal: a Case Study

How to Find Investors To Fund Your Real Estate Deals

The # 1 Secret to Raising Money to Invest in Apartment Buildings

Hope that helps!

Michael

Hai Loc · Answer

@Nick B.

I will try and make it brief

Partnership Agreement is as follows

Capital $3000 me $162,000 investor

Shares 50% me 50% investor

There is no addendum breaking this down even further so its equity and cash flow..

Be bought the property for $145,000 + $5000 closing/acquisition costs and the additional $15,000 goes to renovations. $165,000 all in..

I give the onsite manager a reduced rent of $300 a month to help me collect rent, call maintenance jobs, show units and sign leases. I do have to go there sometimes as being another factor why I get 50%.

Started with 3 tenants @ $345 monthly rent + onsite manager $300 = negative cash flow

Here is the value I bring to this deal.. 4 of 6 vacant units are 80% renovated.. I immediately knew that they can be rented for $450.. and 5 months later I got 5 new tenants paying that much. One of the old tenants moved out so my current rent roll looks like this

$345 x 2 + $300 + $450 x 5 = $3285 gross monthly

NOI with 80% occupied is $2000 (keep in mind no property manager fee, low maintenance as most of the units are renovated)

Here's the catch: On 100% occupancy I am going to use a very conservative NOI even using a 8% management fee at $24000 and Cap Rate at 10%

Value of the property = $240,000 and how much did we buy the property for?

There is more. We plan on after it being at least 90% occupied that we will refinance with the bank. So if we can get an appraisal of even a conservative $200,000 and get 75% LTV we can cash out $150,000. At that point we can recoupe all but $15,000 that we invested and either put it back in the bank and do nothing or reinvest. Recalculate the cash on cash on that and it will be close to 100% annually.

If you can present a plan like this to your investor. How much facts your present will determine whether you get 50%, 40% or even nothing..

Steve Wilcox · Answer

Save as much money as possible so you have a nest egg to invest to get you started, Listen to biggerpockets podcasts for inspiration and ideas, go to local REIA meetings and network with people in your area who are doing business.

Hai Loc · Answer

If I was in your shoes and it was a great deal

I would ask for 50% of the shares/company etc.. if I am going to be the asset/property manager. I would also ask for a set amount as a reserve fund that will be held in the account for 6 months until the cash flow replenishes it and give it back. This will initially lower the return but trust me you don't want to be asking your investors down the road when $hit happens.

I already structured 2 deals where I am getting 50/50 and still paying property management fees as an expense. Again, has to be a great deal

If its an ok deal then you may cut back pending on what your responsibilities are 40/60 35/65 etc..

You should grill your investors on how important a property manager is as a share holder. They are the ones taking care of the cash flow and have an incentive to keep it green

Hope this helps

Jon Holdman · Answer

What, exactly, do you mean by "secure an investor"?  Are you thinking of a syndication where you're the manager and you have investors who put up all the cash?  If so, yes, you will give up almost 100% ownership of the deal.  In addition to being the property manager (if you take that role) you would be the manager of the business.  That's a completely different job and might entitle you to a small share of the equity.  That's certainly negotiable.  But if you approach investors offering a 50% share in exchange for 100% of the cash you're not going to get much traction.

It is possible to go back to your investors if you need more money.  I have an investment in a mini-storage and that's exactly what happened when we had to refi a couple of years ago.  We had to do a cash-in refi and several of the current investors put in more cash.  In exchange they took position ahead of existing investors.  We weren't completely squashed, but the value of our original investment was decreased.  I was part of a start-up where this happened twice before I gave up and left.  These were brutal squashings where the first investors lost most of their value on the first squash.  The second squash essentially completely wiped them out.

Kathy Stewart · Answer

All is negotiable.My suggestion is to discuss openly who is bringing what to the tabIe.  I find that less emphasis on rigid ownership percentages and more on the mutual value of the deal, how financing will be structure/obtained and then the best partnership or JV structure for the particular deal reaps trust, integrity and value for all.

Diana Tian · Answer

Now i am facing this partnership split thing. I looked through previous post. I wonder how you define good deals?

i got a three family ( rent is 1% of purchase price and purchase price is 15% lower than market value). I am investing 50% cash myself. this is my first time working with partner. not sure how much % of capital gain I should ask for?

Nick B. · Answer

Oh, so you get 50% of cash flow and 50% of capital gains, correct?

Now, what if for whatever reason you are forced to sell the building at a loss. Will you take 50% of that loss, or the loss is distributed proportionally to the invested capital? E.g. you sell that building for $65K. Are you out of $50K or just $2K?

Hai Loc · Answer

Doesn't work that way.. we don't split the $150,000 as it is not profit.. you look at the ratio of capital. I put in about 2% capital so I am entitled to 2% of $150,000. I will get 50% of $35,000 which is how much equity is in with the bank. And always 50% cash flow..

Hope this clears things

Nick B. · Answer

@Hai Loc ,  the numbers are good but I don't see how they justify you taking 50% of equity.

I get the cashflow part: you split $24000 equally an each one gets $12K

But what about equity?

If you refinance $150K out of the property, you'll get $75K (good for you!) and your investor gets $75K. However, she invested $162K. The remaining equity is $50K. If you split it 50/50, it adds $25K to you ($100K total) and your investor ($100K total). She is still short $62K and it will take it a little over 5 years to get that $62K from her share of cashflow.

Am I missing something?

How to secure Investor for Apartment Deal

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