Structuring Investor Funded Deals

9 Replies

Hey BP,

I am curious how other investors are structuring their deals with private money lenders in regards to multifamily apartment buildings. Do you give a flat interest rate on the money lended to you? If so, what is a typical interest rate you give? 

Do you give up a portion of equity and cashflow? If so, what portions make sense? 

What terms are you typically offering and how does the money flow back to your private investors?

I realize every deal is a little different, but I am just looking for some solid advice from individuals that have experience with this already. My situation is that I have 3 or 4 friends that want to invest with me, and with their money combined I am looking to purchase an apartment complex. I am unsure however on what terms to offer them in return for their money.

Thank you!

@Kellen Driscol this is a great question. I wish I had the answer. I know that there are syndications that do what you are talking about but the process of creating a syndication maybe more than what you are hoping to do with your friends. I have partnered with investors on deals but it is usually one person per deal and I give them 11-12% return on their capital but that’s on single family residences.

I would also be interested to see how people have structured deals like this. 

I think @Jeff Greenberg or @Gino Barbaro might be able to share some insight on this question.

@Kellen Driscol

Hi Kellen 

I am struggling with this myself. We own all of our units, over 900 by ourselves.  We have been considering syndication the past year but have been blessed to be able to refi and repurpose the funds into the next deal.

I would listen to all the syndicators who have been on podcasts and have shared their model. I particularly like @bruce petersen model of 70/30 split, with ZERO fees, and everything split 70/30.  He has the credibility and track record to do that.  I am inclined to follow that model on our first deal.

Other syndicator splits: Grant Cardone 65/35, Vinney Chopra 60/40. These guys are rock stars and can command these splits.

Most syndicators give a preferred rate of return, around 8%.

If you have 3 or 4 friends, I would consider partnering with them, creating an LLC and an operating agreement. Try to keep your first deal as simple as possible. Start raising money now if you consider a syndication in the near future

Best

Gino

@Kellen Driscol I would second @Gino Barbaro comment. I would keep my first few deals as simple as possible. Your biggest concern shouldn't be the way the money is split, but how can you learn the business and make yourself more efficient.

As an underwriter, I can tell you the profit split is the least of your worries. Sourcing the deal in the right sub-market, finding the right debt/equity partners, running an asset efficiently and then planning an (eventual) exit are things you should keep in mind - front and center.

I agree with both @Gino Barbaro and @Omar Khan to keep it simple. Remember though, it could be an LLC, or TIC and still be considered a security if if the gp has all of the control over the money and the deal. With a small group you can create an LLC or do a TIC with everyone having the ability to vote on what happens to the property. If you take the lead, pay yourself an asset management fee. Everything else can be evenly split or prorated according to capital contribution.

If the other other investors want to be hands off, you need to get a PPM and set up the structure through an SEC attorney.  Our typical structure is a 60/40 split to investors, with an 8% pref return on the cashflow.  It is a straight 60/40 split of the profit at sale or refi.  We do take an acquisition fee and an asset management fee.  There are many ways to structure the deals.

Thank you all for the great responses and ideas!

@Kellen Driscol - have you looked at Michael Blank's Syndicated Deal Analyzer?  I haven't used it myself but have heard good things about it and might give you some insight into how they put their deals together.  It's $99 or $129 I think, so keep that in mind. 

Kellen Driscol average deal these days is a 70/30 LP/go split with something like a 7-8 pref. Total returns in 4-6 years of 70-100% return for investors.

That said the only thing that really matters from the LP view is the total return and IRRs but it’s mostly manipulated by under the hood assumptions that most LP don’t have a clue which corners are cut to get there.

I don’t know why everyone is fixated by the investor splits.

I like the idea of the 8% preferred return and then a 60/40 split. Now once the 8% is paid out of the cashflow, would the remaining cashflow be split 60/40 or if 8% is more than 40% of the cashflow would the 8% be the only returns paid out for the month?

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