I own 18 residential units and I am looking to raise some capital to buy more residential rental properties. Ideally, I would like to buy about $2,000,000 worth of real estate, which in the Philadelphia suburbs can get you anywhere from 15-25 units. At 25% LTV, I would need to come up with approximately $500,000. For this example, I am omitting closing costs. I am comfortable injecting $100,000 of the $500,000. I would need to raise the remaining $400,000. What percentage ROI would my investor expect? I was thinking 10% return on his investment seemed like a decent figure. If the property can generate a 10% return on his $400,000, or $40,000, is it reasonable to propose a 50/50 split on the distributions? I might be aiming high that a 20 unit building will throw off $80,000 after expenses and debt service, but for the sake of argument let's assume it does.
I think it all depends on the investor. On my apartment syndications, some of my investors expect a 10-12% preferred return, while others are a lot more relaxed about the process and comfortable with the figures I show them.
Now, going to someone who has $400k to invest, they probably would be a higher net worth individual who would want a 8-15% return on their money. Not necessarily just from cash flow, but from appreciation, loan paydown, etc. So in X amount of years when you can refinance, you can cash them out and provide them with a solid return
@Phil Goodwin agree that 10-15% is likely expected. Especially if you found someone who would give you 400K.. would expect higher rate of return. Otherwise 10% is standard
Jake: Thanks for the insight. With a preferred return, is that essentially a guarantee of 10-12% before you take any distributions yourself? Are you taking any type of management fee or general partner fee off the top?
This is a good conversation to have with your potential investors. When discussing what you are planning on doing - and if they appear to be interested - you can ask them what amount of returns would they like to receive in order to participate. I have heard of some groups offering as low as a straight 6% return all the way to the more common 70/30 equity split and 8% pref return. I have also seen the 50/50 split with a 10% pref which a team may use if they can reposition the property quickly and want to have a good amount of ownership and hold long term (10 years or longer since the business plan is to return all member capital on refinance to get rid of pref return).
To answer your question about the preferred return, yes, whatever your preferred return amount is will be paid out to the investors before you get any distributions yourself. The only exception to that would be asset management fees that the general partnership may charge for management.
You have received a lot of great feedback already. What's important to keep in mind is whether you're going to take a JV route or syndication. I'd avoid syndications for anything below $1MM due to the high costs associated with it. But it's ultimately your choice.
When choosing the JV route, again as mentioned, you can offer one thing but it is more of an open discussion with your future investor as to what they will ultimately agree to. Besides it also depends how involved they will be in the project. So many moving parts that should be jointly agreed upon.
Keep in mind, it doesn't have to be pure equity deal, you can make it into debt/equity split as well.
8% and 1 point, I wont go any higher than that for private investors. All they are bringing to the table is money and that is plentiful.
I pay 7-9 % plus 50/50 or 9-11% with no equity split.