I'm still a little fuzzy on the details of how an investor might be paid. I hear lots of talk on here and in the podcasts about getting investors X% return on their money but what does that really mean? Is it the percentage for one year or is it over the course of many when the property is sold or refinanced? Do they get a monthly payout of net income? I want to start looking for investors but this is the part of apartment investing I understand the least. Does anyone have any good resources or could someone give some actual examples of what this might look like? Say I have someone who is willing to put up $50,000. How long will their capital be tied up, when will they get some or all of the return? What percentage of ownership would they have vs. me?
You put a cart before a horse. You need to build a track record and have completed at least one apartment deal before looking for investors. Otherwise, why would they want to invest with you?
Great question, and there isn't just one answer - it's pretty much whatever your investor is comfortable with, and obviously something that you'll work out in writing with the investor before the deal goes through.
Some investors feel comfortable just making a debt style investment, some prefer to take an equity stake. Some require monthly payouts, some just want the money to grow and they'll take it out when the project sells.
Your investor is going to want you to have "skin in the game." It's hard to get someone to give you 50% of a deal if you have no track record and no money tied up in the deal. Some things you can bring to the table if you don't have any money are time and experience. Your work in rehabbing or managing is worth something, as well as finding the deal.The investor can either cut you in on a percent of the deal or pay you for your time - it's a great way to get started. Many of the investors I've worked with want the exact percent of their contribution. If we both put up $50,000, then we'll each get 50% of the monthly cash flow and 50% equity when the project sells. If I'm only putting $25,000 down I'd just get 33%. Being the agent listed on the transaction brings an additional commission when we buy and when we sell, and I would generally take a 10% management fee, and that's how I would make more money in the deal and it would make more sense for me.
@Skyler Smith if the project is a rehab type deal isn't it possible to refi and cash out if the deal was good enough and get the partners money back that way aswell?
Yes indeed @Daniel Alegre , that's another great way to get the investor's money back. The way Robert Kiyosaki does it is he puts the investor's money together, they buy a distressed apartment complex, fix it up and refinance, pulling all of the investor dollars out. In that mode the investors still get the residual cash flow after the refi.
we usaully combine equity and monthly interest payments. Highly recommend www.groupsponsor.com/
Gene Trowbridge has a book an program that deeply explains most of your questions. I refer to his material all the time.
Ah... Deal structure is the most fun part of a deal. I like putting together the capital formation even more than I enjoy structuring a deal with a seller; both can be as creative as you'd like it to be as long as everyone understands and has reasonable expectations.
In my apartment syndications we form a single purpose LLC for each deal.
I find the deal.
Put the deal structure together (I love seller financing).
I do all the due diligence and share everything with my investor members.
My partner and I qualify (sponsor) the bank financing.
Then we raise the necessary equity.
To keep things simple, let's say we raise $1M
with 10 investor members putting up $100k.
Let's say that $100k contribution buys 5% ownership.
We give the investor members an 8% preferred return - meaning the 1st distributable cash flow gets paid out 100% to them until they get 8% on their investment each year. Then we split cash flow after they get their preferred return.
For management purposes we do quarterly distributions.
When we sell or refinance (like someone mentioned above- we tend to refi our principle out in about 16 months or less on reposition deals) investor members get their principle back and net profit is split prorate according to ownership percentage.
This structure is attractive to a lot of investors because it's simple and ties my reward to the overall success of the project.
I have capital of my own but want to add to it. Therefore I do have skin in the game. My initial investors on my first aquisition are a family member and a friend who I've already approached and who are interested. I just need to figure out the structure I'll use. Once I have one under my belt I can seek others. Thanks @Michael Tempel for the references, I'll definately check them out.
@Mark Neiger There are a several metrics you will hear tossed around as far as returns to investors. The two most important ones being IRR and Cash on Cash.
IRR (Internal Rate of Return) is the measure of the return OF capital and return ON capital over the life of the investment. This will include the monthly cashflows, cashout refis, and sale proceeds plus original equity. Some investors prefer this measurement because they feel it gives them a better measurement of the entire investment. Some investors don't care much about this because there are so many predictive variables that one really cannot forecast accurately 10 years out.
Cash on Cash however, is a very accurate and immediate measurement. This is the cash you received (usually annually or annualized) divided by the amount of cash you put up for the investment. Typically profits are distributed quarterly and measurements are tracked for the given year. Investors will have their capital tied up for the long term ownership of the property, and they will enjoy additional returns from mortgage pay down, appreciation, etc, but not until the end of the investment. If an investor can make 8-12% return cash on cash plus all of those other benefits upon the sale, then there will be interest in investing. They can take that immediate Cash on Cash return on their capital and reinvest it in similar deals.
A great place to learn about how to calculate these types of returns is CCIM.com. Check out their educational courses and books for more info.
@Mark Neiger The way I've set up my syndicates is to form a property specific LLC with me (in this case you) as the manager of the LLC and each investor buys shares in the LLC which then purchases the property. As the syndicator I put skin in the game but also get some shares for the work done in getting the deal together. I don't give a preferred return as the investors share in the returns depending on the percentage of the shares of the LLC they purchased. I distribute the cash flow quarterly along with a letter discussing the operations. I buy and hold apartments and the investors are also of the mindset of getting tax advantaged passive income so there is no expectation of a sale and capital gains. It's important that you be sure everyone understands the reason for the investment so they are all on the page as you in the investment. Good luck.
Most of this has been said. You can setup the returns as cashflow from operations and distributions after sale. You can also put in your provisions for return of capital from any refinance.
I like to setup an 8% preferred return. Keep in mind that this number will accumulate if you are not able to return the 8%. During this past downturn I had a property that did not return anything for a few years. All of that money accumulated and needed to be paid with proceeds from the sale. In that situation you end up working for free for long periods of time.
I like to setup a waterfall for the returns on sale. Initially the investors get 80% of the split until they have made a certain return on the initial investment. Once that amount has been met, the split goes to 50/50. That way I am rewarded for doing a good job. Proceeds on sale should go in an order something like:
- Pay any lingering bills or other obligations
- Return any of the initial capital that is remaining
- Return any unpaid preferred return
- Split profits as agreed
Does anyone have any experience in Multi-family development? I'm looking into doing a multi-family conersion and curious about return % to invetors. The project would probably include retail space on the first floor and 4-10 condos for sale. Total project time approx 14-16 months.
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