Have the investors...now what?

15 Replies

I have the deals and I have interested investors but I am unsure how to structure the deal. I am planning on using 90-100% investor money in buy and hold opportunities. What returns do I give investors? An 8% preferred return? A change in equity ownership after 70% of their initial investment is returned to them?

What have people found works best for them and their investors? Would be happy to speak with someone regarding their experience 

I would start with speaking with your investors to see what their expectations are. I know thats a loaded question, but you need to see where their "baseline" is and work back from there. There are a myriad of ways to set that up to achieve your - and your investor's goals. Some investors want no part of being in the long term ownership, some do. Some would rather see themselves as a quasi type lender, getting bought out as quickly as possible. That is a key piece of information first. Once you get that, i would strongly recommend sitting down with a RE attorney and your CPA. I always speak with my client's CPA in structuring a venture. Both aspects - legal and tax - are critical and both can save (or cost) you substantial sums of money unnecessarily.

This depends largely on the deal itself. There are so many variables and different ways that you can structure it, but at the end of the day, it depends on you & your investors goals. 

We invest solely in multifamily. We typically do a 75/25 equity split with an 8% preferred return for investor/operator synchrony. We also, typically put some of our own money in the deal, which gives us some more credibility on our belief that it's a solid deal. Sometimes instead of investing our own money, we use our acquisition fee as our investment and include that into the investment fund. So, if it was going to be a $75K acquisition fee, we'll add that into the fund and get a 75% split on the overall profits based on our $75K investment, plus our asset management fee, & our 25% equity of the deal. 

Your exit strategies also play a role in how you structure the deal. We always want to have some type of liquidity event from year 3-5 so that we can return at least 75% of our investors capital, so they aren't illiquid in the deal for too long. That's typically what I hear from investors, is that they don't want their capital tied up in one asset for too long. 

You also want to be sure that your investors aren't putting all their eggs in one basket. If you look out for their best interest, then they will look out for yours as well. Make sure they haven't invested all the capital they have in this one deal, and make sure they understand the time table and risk that comes with investing in real estate.

What type of properties are you bringing investors in on? Single family? Single family portfolio? Multifamily? Multifamily portfolio? Mobile home park? Self Storage? Retail? Commercial? Office? The structure of the deal depends on the needs of you and your investors. Make 100% sure that, however you structure it, it makes your investors happy, lines up with your end goals, & is conservatively underwritten so you can be sure that you won't lose your investors capital. 

First job of a syndicator is not to lose your investors capital. Second job is to make them a return on their investment. 

This doesn't make much sense to me. How interested can the investors be in giving you all of your spend on a property if you haven't talked returns and each investor may have a different expectation. When you say you have the deals, you have deals under contract and ready to deploy? Will you use any of your own money, 10%? If you are planning on using all investor money, I'm not sure where you are finding deals that would pay each of them 8% return on buy and holds.

Thank you, this is very helpful in understanding where the line in the sand stands. I was a restructuring banker in nyc for a couple of years until i found more interest in real estate. I now own multi-family, single family and student housing but haven't utilized any investor money. I'm looking at taking down bigger projects and a couple of my old co-workers are interested in jumping on board given my track record. 

You need to ask these investors what they're looking for. You don't have investors until their funds are in your bank. In reality, a huge portion of them will not actually invest. That's just the way it goes. Either the timing won't be right for them, they were never interested, or some other factor that keeps them out.

The best structure for you is probably a 506(b) syndication. It allows you to take an unlimited number of accredited investors and up to 35 non-accredited, sophisticated investors. You must have a pre-existing substantive relationship with them.

You probably need to qualify these prospective investors a bit more and get an indication of what investments they would and would not be interested in.

Every investor has different preferences which can make it tricky. 

For what we do, we get the investor in at 8% returns with plans to refinance in 6-12 months, so they know when they're getting their money out. (we're doing SFH, but looking into multi right now).

Nothing is worse for an investor if they don't know when they get their money back. 

If you're doing buy-and-hold multi, depending on how good the deal is, you'll need to sit down with them, and who you'd refinance with to get a time table for when they will get their money out.

That way you can get it in writing and you're not suddenly having investors pinging you "hey, I need my money out." 

This will also depend on how experienced these RE investors are. 

New? They may think it's like the stock market. In and out in a whoosh. 

Experienced? They may not care how long you hold their money as long as you keep them updated on the properties.

@Max Fesser

All good advice above.

You're probably aware that at the end of the day, returns are set by investors and what they expect. But you're probably wondering what the general 'market' is. I wondered the same when I first got started.

One great way to research is to sign up to receive other people's PPMs. Then you can start to develop a baseline for 'market' expectations. 

Keep in mind that you might be comparing KIAs to BMWs - what I mean by that, if an investment group is primarily focused on Midwest turnarounds, they'll likely offer 8 prefs or higher. But if you're focused on West Coast stabilized, you're more likely to see 5 prefs.

The equity split will also depend on the sophistication of the syndicator and the type of investors that he/she is working with. Working with PE folks or finance people? Then maybe you apply an IRR hurdle before the promoted interest is earned and a clawback to protect the investor in case the hurdle isn't met at exit.

Or you might simply apply a Cash on Cash preferred return before the promoted interest split. 

I'd start with some of the biggest funds - what do they offer. What do publicly traded ELS / SUN REITs offer? 

In theory, investment returns are based on alternative uses of money. So by knowing what the alternative return structures look like, you can best position yourself with your investors. It sounds like your investors also need to be educated on these issues and you can bet, at some point, when you start to talk actual numbers, they'll be curious to know how it compares.

@Max Fesser

This doesn't sound right to me at all.

You don't have the investors if you have not discussed with them the structure or payout.
There are many people who will say "yes" I will invest with you. That is a lot different than you having their cash or a letter of commitment from them.

Regarding what you can ask for as a fee, that is negotiable between you and the investors. The better the deal and the more experience you have, the more you can charge.

@Max Fesser

A lot of very good advice already. If you plan to bring passive investors into the projects, then you need to educate yourself on syndications. There're books: "best ever syndication book", "It's a whole new business", etc.. There're numerous podcasts on the topics with a ton of great guests. Listen in and connect with some of the folks that're being interviewed to network with them.  I also recommend speaking with a few securities attorneys once you get a handle on the terms before you share anything with investors to ensure full compliance with SEC regulations. 

Here're a few articles to get you started: 

https://www.biggerpockets.com/member-blogs/10850/87614-interpreting-the-private-placement-memorandum-ppm

https://www.biggerpockets.com/member-blogs/10850/86626-the-pros-and-cons-of-investing-via-real-estate-syndication

Originally posted by @Max Fesser :

I have the deals and I have interested investors but I am unsure how to structure the deal. I am planning on using 90-100% investor money in buy and hold opportunities. What returns do I give investors? An 8% preferred return? A change in equity ownership after 70% of their initial investment is returned to them? 

What have people found works best for them and their investors? Would be happy to speak with someone regarding their experience 

 We've done a lot of structures on our syndications. From straight 8% interest with 20% profit share on top, to simple splits 75/25, 80/20, etc, to preferred returns with splits thereafter. The only thing that matters is making sure you feel like it's equitable and your investors feel the same. Just have to make sure you know your audience that you'll be pitching the structure to. We've also included provisions that if investors get 100% of capital back from a refi, then the split changes. For example, say it was 80/20 going in, but now that they have all their cash back it goes to 50/50. 

To gauge interest you could take some reservations / soft commitments.

Good luck and reach out anytime! 👍

@Jacob Blackett

Remember the Holdfolio Presentation you did for the Seoul Real Estate Investing Meetup a few years back? You guys were definitely in early on the crowdfunding trend.

Hope you and Sterling are doing well

Let me know if you come across any interesting mobile home park deals near Columbus, Ohio.

You don't have the investors until you actually have their money and who in their right mind would give you the money before they knew the deal structure.

Could be family members though, who are just supporting you blindly. 

Originally posted by @Jonathan Greene :

This doesn't make much sense to me. How interested can the investors be in giving you all of your spend on a property if you haven't talked returns and each investor may have a different expectation. When you say you have the deals, you have deals under contract and ready to deploy? Will you use any of your own money, 10%? If you are planning on using all investor money, I'm not sure where you are finding deals that would pay each of them 8% return on buy and holds.

 It's free real estate

Originally posted by @Daniel Ryu :

@Jacob Blackett

Remember the Holdfolio Presentation you did for the Seoul Real Estate Investing Meetup a few years back? You guys were definitely in early on the crowdfunding trend.

Hope you and Sterling are doing well

Let me know if you come across any interesting mobile home park deals near Columbus, Ohio.

Do you have a lot of mobile home parks in Columbus, Ohio? 

Originally posted by @Daniel Ryu :

@Jacob Blackett

Remember the Holdfolio Presentation you did for the Seoul Real Estate Investing Meetup a few years back? You guys were definitely in early on the crowdfunding trend.

Hope you and Sterling are doing well

Let me know if you come across any interesting mobile home park deals near Columbus, Ohio.

do you buy just mobile homes? or just the parks