How could I finance this complex without my money?

Question

I found a seller who wants to sell 8 townhomes (4bed/2.5bath/2200sqft each). They currently rent for 2200 each. 5 of them have 12 month contracts on them, the other 3 are currently vacant due to renovations being done. It is listed at 2.5Million. (I would offer closer to 1.9)

I currently do not have the ability to put a down payment on this property. I would be looking to get a silent investor.

How would repayment work? Could I add value by giving the investor 100% of profits until his downpayment was returned with interest while I managed the property?

I am just not sure the correct way to structure this. I am new to commercial, and while I am not jumping into this deal.. I would love to at least hear how you would go about it.

Taylor L. · Answer

In our deals, we pay investors a preferred return and a split of proceeds at close. Generally, investors want their deal sponsors to have some skin in the game financially.

What you've described seems more like a hard money loan type of situation, which is going to cost a bit more than equity investment.

When you add value to multifamily, it's almost a guarantee that there will be a drop in occupancy initially as you evict the non-paying tenants, and as you raise rents folks will move out. That could mean difficulty paying the note on your hard money loan.

What is the NOI? What does a $2.5MM price mean in terms of cap rate? What about your $1.9MM?

What specifically can you offer your investor in terms of return on this deal? Generalities only take us so far here.

Greg Scully · Answer

Account Closed - I would offer some type of preferred return (6-8%) and a split of the profit at sale (50-50, 70-30).  The returns split is completely negotiable.

It could also be treated as a straight debt position with a higher return with a fixed term (maybe 24 months), those are typically interest only with 2-4 points (1% of the loan for each point) payed upfront or partially financed.

Kenneth Garrett · Answer

Account Closed

Are the townhomes all in one building/lot?  Are they separate lots for each?  It may make a difference whether you are acquiring a commercial or residential loan.  You can get a commercial loan either way.  Big difference in determining value.  NOI v Comps.  Commercial V Residential.

As far as funding, I as assuming you are looking for down payment money and you are financing the balance.  25% down.  Private lenders, hard money etc.  You might want to partner on this if you haven’t done something like this before.

To answer your question, there are many ways to return the down payment.  Cash flow until it’s paid, P&I.  For easy math 25% of 2,000,000 is 500K.  Is the plan to sell in the future or are you trying to develop a debt investor only.  The strategy is important.  How will you pay them back?  Say at a 10% annual return in 5 years.  This seems like a small return for this type of money.  Most larger purchases investors are looking for higher returns15%-20% overall, but it’s done with a preferred interest rate and a percentage of equity at the end.  This can be done by selling or refinancing.  The end strategy is critical.

How could I finance this complex without my money?

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