How to secure Investor for Apartment Deal

20 Replies

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.

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.

Jon Holdman, Flying Phoenix LLC

That makes sense and yes, by secure an investor I mean I would need someone to put up 100% of the funds. I do understand that my take would be much less and ownership would be almost 100% the investor. That is something I would need to try and negotiate with them.

Taking on the manager role would not be the long term goal but for the 1st deal, I would assume that would be necessary if for nothing else than to make a living since the "Management Fee" and profit, if any going to me, would be small with a 100% deal.

Naturally I would prefer to have 1 investor on a deal but I understand that is not always the case. So how would you propose avoiding the type of issue you ended up in as my goal would be to protect the investors as much as possible especially the one that started me out?

Thank you for your response and any other advice would be great as well.

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

Hai Loc, that is very helpful, thank you. That is what I was hoping for as far as options when structuring a deal like this!

When you say 50/50 and still paying management fees as an expense, what exactly do you mean? Paying it to whom? Sorry for the dumb question.

On the reserve fund, do you use any specific formula or % to go off of to determine how much should be held?

If it's a smaller deal you might have more success getting funded. If it's a larger deal more astute investors or high net worth will not agree to those terms with a person with no track record or skin in the game.

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

What sort of numbers are you talking about? Purchase price, capital required to close and first 3 months of operations, and how about income expense as well as potential cash flow before and after debt service?

If you are bringing a good enough deal there are ways to carve yourself a small piece of equity, cash flow, or at least a finders fess. 

@Joel Owens  thanks for the advice! Helps to give me a jumping off point and @Steve Wilcox  that ties into your questions because I am asking in general for the purpose of just knowing if that type of deal even exists before I spend a ton of time working on something that is impossible. I am new to this part of the business so its a large learning curve so I dont have any actual numbers to provide as an example.

Any other advice you or anyone could give me would be greatly appreciated.

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.

@Rusty Knowles  

You didn't highlight my name so I had no clue you replied.

Some investors put the deal together and become asset managers and property managers if they live close enough to the subject property. They ask for a bit more of the share say 65-75%. 

I personally cannot manage any property myself because I am in Canada and all my properties are in the US. So I am strictly an asset manager. I found deals so good that my investors are willing to accept a 50/50 split and we are still paying a 3rd party property manager/management company as expense. 

I came across a few investors that said if I am going to get 50% I am responsible for either property managing the property myself of pay and 3rd party out of my 50% share. I gave them the finger because my deal was too good and they were too greedy.

I would put away a 5% of purchase price reserve fund. Furnaces, hot water tanks, Septic tanks or whatever is costly. But if the inspection comes away flawless (This never happens unless newly built property) then you can lower it as much as 2%.

Yes, sorry @Hai Loc  I didnt tag you appropriately and thank you for the response.

On the deal where you are asset manager, how much of your money were you required to put up and did you have the capital for that or did you get funding elsewhere?

For my first deal I put down a total of $3000 which included $1000 earnest, $750 inspection, $900 partnership set up and a few other things. I tried to re coupe it back from my investor but she wanted some skin in from me. So I put in less than 2% and 98% from her side. That's capital but the share of profit is 50/50.

My second deal I forked out close to $15000 and recouped it all back when cash was wired to partnership bank account. This is also a 50/50 mixed with some fixed interest rates to investors. 

Hope this helps..

@Hai Loc , could you please provide more detailed example of your deal structure?

Why would your investor(s) give up 50% of their profits (cash flow only or equity as well)?

Thanks
Nick

@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..

@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?

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

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?

Originally posted by @Hai Loc :

@Rusty Knowles  

You didn't highlight my name so I had no clue you replied.

Some investors put the deal together and become asset managers and property managers if they live close enough to the subject property. They ask for a bit more of the share say 65-75%. 

I personally cannot manage any property myself because I am in Canada and all my properties are in the US. So I am strictly an asset manager. I found deals so good that my investors are willing to accept a 50/50 split and we are still paying a 3rd party property manager/management company as expense. 

I came across a few investors that said if I am going to get 50% I am responsible for either property managing the property myself of pay and 3rd party out of my 50% share. I gave them the finger because my deal was too good and they were too greedy.

I would put away a 5% of purchase price reserve fund. Furnaces, hot water tanks, Septic tanks or whatever is costly. But if the inspection comes away flawless (This never happens unless newly built property) then you can lower it as much as 2%.

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?

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.

Medium 11 12 16 logo stewartinvesting   copyKathy Stewart, Stewart Investing | [email protected] | http://stewartinvesting.com