How to Structure Investor's Returns on a 14-Unit Multifamily

2 Replies

Hello BP,

I hope everyone is having a successful and productive 2018 so far! I would love to hear how other investors structure the returns for a financial partners on small/medium multi family buildings? I am currently negotiating on a 14-Unit Multifamily in a small town in rural Alberta, Canada. I grew up in this small town and currently live in the city of Calgary which is 2 hours away. I found the deal by driving for dollars, taking down all the addresses of the multi-family buildings in the town, going to the local registry office to pull titles, and cold calling all of the multi-family owners. I found a lovely 80yrs old couple that have the 14-unit building running very well, but are ready to finally retire and relax! We are in the negotiation stages and I should have it under contract this week.

There aren't a lot of options for property management in the town, so I am going to have to manage it remotely for a couple of months until I get a family member trained up and ready to look after it. The deal provides really great cashflow and there is lots of room for management fees. 

I have an investor that is willing to put up the initial down payment and closing costs. We had previously set up a 50/50 Joint Venture agreement on a 4-plex. The financial partner qualified for the mortgage and put up the down payment, closing costs, reno's etc. Once his initial investment was paid back we split the cashflow/equity 50/50. I found the deal, property managed, etc. Will this type of deal work for a 14-Unit or should I offer more of a preferred rate of return until we re-finance and I can pay back the initial investment? He will likely want equity in the deal, but I'm not sure I want to give up 50%. 

Any advice on how to structure returns to investors on small multi's would be very helpful and greatly appreciated! Thanks and happy investing!


Travis

A lot of it depends on how much money you are putting into the deal on the front end, what your investment horizon is, how many other investors there are, how much cash you need up front, etc. 

If you have just one partner putting up the down payment and closing costs, I would try and keep things very simple with a straight equity split. Figure out what percentage return he expects, and then base your equity split on that expectation combined with the actual financials when you buy. Then, when you rehab the property and it performs, you both win. 

I agree with Kyle that it really depends upon your goals now and in the future. If this is a relationship that you want to continue to use in the future and both of you will be the only equity partners in this, then an honest conversation about what each expects appears in order. I would definitely consider putting the property in an LLC and then memorializing the expectations/agreements in the operating agreement.

Also, I hear that property management will be handled by a family member in the future - I would make certain that this fee is also ironed out ahead of time, whether you are hiring an outside person or family member.

Have you considered syndicating the deal and offering it out to other investors? If this relationship with your financial partner is solid, you may want to look at this option, giving a preferred rate to investors and you/your partner developing the schedule of hurdles and splits.

Many options to consider, but honest conversation with your partner seems in order. Good luck - let us know how it goes!

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