How to pay myself in a MF deal?

15 Replies

If this has been well answered elsewhere please point me there, I couldn’t find it.

If I’m look at small mf deals that require more than one additional partner, so in my area more than $500,000 per say. These would be 10 or more units. I suppose the same principle ultimately applies to any size though. I would be self managing. 

Would you account in a management cost that would pay to you plus than the true profit percentage split on the back end, or would you design it somehow else?

For example: I account in 9% as a management fee total for both lease ups and everyday mgnt. Then as well  my 2 other cash partners and I agree to a 3 way split of all profits. Is that how it’s typcially structured?

I do understand you can structure it anyway you want to, but a typical well balanced approach is what I’m looking for. I’m trying to figure out analyzing the next size of property.

Thanks!

If you are in an LLC you could be an employee officer and be employed as property manager for an agreed upon fee. If you own it on your own there is no need to differentiate.

Of course. Unless that is, your partners are bringing the capital and you're only bringing the sweat equity. But that's a negotiation between you and your partners.

You should separate the different functions of finding the property, raising money for the property, buying the property, managing the property, and selling the property. Put a value to each of those functions. Which part of that will you be contributing and which part of that will your partners/investors be contributing.

@Daniel J.

Hi Daniel

I would think 9% as a total management fee to run the deal, not additional fee to lease up the units.

The deal can be structured any way: based on % of cash invested, partners can give you small piece in return for you managing. You can also charge small acquisition fee and roll that into your equity.

Draws would be based on ownership. Management fee is top line cost and you would receive that.

Gino

@Gino Barbaro That’s exactly what I’m looking for, thanks! For clarification depending on what you negotiate in the deal and what your partners desire/are willing to do, you could have it as a described with both say a 1/3 equity plus management, or your management basically rolls into your equity forming that 1/3 ownership. Is that correct?

I think the podcast you and Jake were on is one of the best down to earth ones for MF investing so far. I might be biased because I’m a restaurant manager though.

@Michael Le Are you basically describing it as the “typical” syndication style I hear people talk about with an acquistion fee, management fee, actual profit etc and determing what those are and how they are split up? 

@Daniel J.

I feel your pain. Keep working toward multifamily!

Gino

Originally posted by @Daniel J. :

@Michael Le Are you basically describing it as the “typical” syndication style I hear people talk about with an acquistion fee, management fee, actual profit etc and determing what those are and how they are split up? 

Yes, I am but I don't see why a JV couldn't be the same way? Unless you're sure that everyone will contribute evenly this is a way for you to come up with an agreeable split. If all partners are contributing the same amount of capital but you are the one who found the deal and doing the day to day management, it obviously doesn't make sense for you to only get a prorate share of the profits.

If you are trying to get paid extra to manage the property, just make sure the other tasks that you do is equal to your other partners. 

Originally posted by @Daniel J. :

If this has been well answered elsewhere please point me there, I couldn’t find it.

If I’m look at small mf deals that require more than one additional partner, so in my area more than $500,000 per say. These would be 10 or more units. I suppose the same principle ultimately applies to any size though. I would be self managing. 

Would you account in a management cost that would pay to you plus than the true profit percentage split on the back end, or would you design it somehow else?

For example: I account in 9% as a management fee total for both lease ups and everyday mgnt. Then as well  my 2 other cash partners and I agree to a 3 way split of all profits. Is that how it’s typcially structured?

I do understand you can structure it anyway you want to, but a typical well balanced approach is what I’m looking for. I’m trying to figure out analyzing the next size of property.

Thanks!

 Daniel, yes, I would say you should account for the management fee, in our area on MF the rate is 8% and then it goes down relative to unit size, you have to consider no matter the partnership, someone will have to get paid for this whether you are the defined management or a 3rd party group - 

Daniel,

For what you are describing it definitely looks like you are not looking at a syndication, which has a more complex fee structure.

So in your case, as everyone has already pointed out, it will depend on the negotiation between you and your partners and what everyone is bringing to the table. That being said, if you are the partner managing the daily operations of the property and carrying out the business plan for the investment, then for that size property 9% sounds fair.

Beyond that, if your other two partners are only bringing capital and nothing else, you can negotiate an acquisition fee at the time of closing (In large syndicated deals goes from 1% to 3% of purchase price or total raise). This is of course if you are the one finding the deal, securing the financing, and putting everything together. And just as @Gino Barbaro you can roll that acquisition fee into your equity, which many people do to enhance their upside at disposition.

Happy investing!

@Daniel J.

Hi Daniel

This is what my partner and myself did when we started. Whatever % of equity we brought in is what was our percentage of ownership. He was boots on the ground and managed the asset. He was paid 10% management fee to manage the property.

I think that is only fair. He did a better job than a property management company, and I would rather pay him than a company.

Gino

@Gino Barbaro That makes sense, it seems like that would be the easiest way to do it. To begin with I don’t have any equity to put down, but i suppose once again all that is negotiable and will differ person to person.

Thanks!

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