Syndication or Partnership?

17 Replies

Greetings BP Community!

There is a 21-unit apartment building that is for sale in my area. The owner is willing to do Seller Financing with $200,000 down. The problem is my husband and I don't have $200,000 cash (banks want around the same amount for the down payment and closing costs). I haven't put in an offer yet because I don't want to waste the seller's and our time if we cannot even secure the financing for the acquisition. 

To raise the funds/obtain the property, would it be best to form a syndication or a partnership? 

Thanks in Advance! :) 

@Brittany Sanchez  Hi Brittany!  If the deal is good, it is very likely you can find someone to partner with you on the deal or do a small syndication. If you do a syndication, there are many rules because it is considered a "security" and you need to make sure you understand what you can/cannot do. Rules determined by the S.E.C. (Security and Exchange Commission).

I would not necessarily promote paying a higher price, but…if the deal still meets your criteria at a slightly higher price, you could try to negotiate with the seller and offer a higher price in exchange for a lower down payment.

Also, I am not sure if you have purchased properties before, but if you are considering taking other people’s money, make sure you go through a very thorough due diligence. Ensure you engage a 3rd party to do the due diligence and ask them for sample reports they have done in the past. Also, make sure the due diligence company provides quotes for repairs. Some companies provide a report with no estimates for repairs and this is somewhat useless unless you know what it takes to fix the identified issues.

@Brittany Sanchez - I think for a property of that size and the required funds to close, it likely won't make sense to do a syndication with how much the sec attorney and doc prep fees will be.  You could probably partner with one, maybe two investors and purchase the property with significantly less expense.    

It's only a 21 units, do a JV. Syndication is complicated with lots of rules and restrictions.

Hi @Brittany Sanchez ,

How much does the build cost, net cashflow (monthly gross revenue minus monthly expense only, do not include any estimated mortgage payments), interest rates and terms (amortized over 20 ,25, or 30 yrs) from both bank and seller? And I'll see if I can help suggest a potential structure.

Daniel

Originally posted by @Brittany Sanchez :

Thank you so much, @Tamiel Kenney , @Brendan Kelly , and @Jessie Niu, for your guidance! I was on the fence about this, but I believe you all are absolutely right. 

Jessie, is there a difference between JV and partnership?

JV is special type of partnership. In general partnership, each partner participates in business operations and is liable for company actions; JV is short-term partnership, usually formed for a single purpose, such as funds, once established, it can be structured later to the way you want.

@Brittany Sanchez partnership is the way to go.  It is however a red flag that the seller is offering you seller financing in this strong market.  It could still be a deal but keep your eyes open!  How many apartment deals have you underwritten yourself?

Partnership is the best way with either bank or seller financing. I agree with @Ivan Barratt that you should pay close attention if the seller is willing to finance the deal. There are many reasons he/she may want to do it, but this is a really solid market for a seller, so most want the cash. 

@Daniel Y. The seller is asking $875,000.The APOD is showing a net cash flow of $4,425/monthly. I haven't submitted an offer to get the interest rates and terms of the loans from the seller financing or from the bank yet. I am seeking partnerships to help with financing the acquisition. The APOD doesn't even support an asking price of $875,000 (it supports a price of $578,000). I'm looking to do the BRRRR method on this property. It has plenty of room for adding value and increasing the NOI.

@Ivan Barratt The property of interest is a rough one that needs new tenants, a new owner, and a new property manager. Currently he wants way too much for it in its current condition. I have been keeping my eye on this property for awhile (because my 4-plex is a stone throw away). My husband and I have done 3 deals (one 4-plex, one 6-plex, and one SFH) since we began our real estate investing careers in February of this year. I am very ambitious, but after speaking with Dale Hensel I have become even more inspired to go bigger.

@Brittany Sanchez That's crazy. From your numbers, they are asking for ~6% Cap rate on the property, while your number suggest ~9.2% Cap rate. The reason I ask is because there may be a creative way to structure this, which is if the owner was willing to do seller finance. You get a loan from the bank first as a first lien, then you still have owner financing come in as a second lien to pay for the down payment. However, at 875k, it just won't work. The other hurdle is if the first lender would even allow a second lien on the property, so you would have to search and ask.

Good luck with the property! If it doesn't work, you will find another in the future.

Originally posted by @Brittany Sanchez :

@Daniel Y. The seller is asking $875,000.The APOD is showing a net cash flow of $4,425/monthly. I haven't submitted an offer to get the interest rates and terms of the loans from the seller financing or from the bank yet. I am seeking partnerships to help with financing the acquisition. The APOD doesn't even support an asking price of $875,000 (it supports a price of $578,000). I'm looking to do the BRRRR method on this property. It has plenty of room for adding value and increasing the NOI.

@Ivan Barratt The property of interest is a rough one that needs new tenants, a new owner, and a new property manager. Currently he wants way too much for it in its current condition. I have been keeping my eye on this property for awhile (because my 4-plex is a stone throw away). My husband and I have done 3 deals (one 4-plex, one 6-plex, and one SFH) since we began our real estate investing careers in February of this year. I am very ambitious, but after speaking with Dale Hensel I have become even more inspired to go bigger.

Not too sure about your $578,000. It might be hard for you to get a 9 cap in this market unless the seller is very motivated. Or they offer seller financing with higher price such as this. 

@Ivan Barratt I have not submitted an offer yet so I am not certain of the condition on the inside of the units. Based on the outside and its current tenants, I imagine it's not good. Spit-balling it, I estimate I would spend (at most) $5,000 per unit. I have lines of credit and income from my properties that should be enough to cover the reno budget. 

Originally posted by @Daniel Y. :

@Brittany Sanchez That's crazy. From your numbers, they are asking for ~6% Cap rate on the property, while your number suggest ~9.2% Cap rate. The reason I ask is because there may be a creative way to structure this, which is if the owner was willing to do seller finance. You get a loan from the bank first as a first lien, then you still have owner financing come in as a second lien to pay for the down payment. However, at 875k, it just won't work. The other hurdle is if the first lender would even allow a second lien on the property, so you would have to search and ask.

Good luck with the property! If it doesn't work, you will find another in the future.

 It's actually quite normal in this market for lots of sellers asking for a 6 cap, especially when are willing to seller finance. It would be hard for her to get 9 cap in this market.  

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