Starting a commercial apartment investment business
Real Estate Investor · The Bronx, NY · Member since 2012 · 35 posts · 2 votes
Hello fellow big pocketers,
Are there any commercial apartment investment business owners or potential owners that can guide me or give advice?
My pipeline is getting moist with potential deals coming to the feast. At the moment, my budget is tightly constrained.
So what is feasibility of getting start-up funds for marketing and operations for my commercial apartment investing business? and what is required to acquire these funds?
What do you mean by "commercial apartment investing business"? A brokerage? Buying apartments? Something else?
If you're buying apartments, you need to have some experience. That, combined with a down payment, will get a bank loan for the rest of the purchase price. From there, its just another rental property. Bigger, more units. More risk in some ways, less in others.
Jon Holdman
Buying apartments and finding apartments of investors in a business system. With a great business plan can I obtain the funds necessary for marketing and operations?
Sorry for the misunderstanding
Sorry Carlos Liriano but I'm still confused. I don't know what you mean by "finding apartments of investors in a business system".
"Buying apartments" is, I think you buying and operating apartment buildings. That's simple enough. Get a down payment, find a building, get a loan, buy it and collect the profits.
I'm getting the impression from what you're writing that you don't have the cash needed to actually buy apartments and you're wondering if you can raise that money.
Yes, that's possible. "Syndications" are a common way for a "promoter" (you) to put together a deal. You find the property, the create a "private placement". You find investors to put money into the deal. These are "equity" investors. You use that money for a down payment and get a loan for the remaining amount to buy and operate the property. The net profits (hopefully, losses if not) from the property get distributed to the equity investors.
Now, there are a number of issues with doing this sort of deal. If you have none of your own money and no experience, this is going to be incredibly difficult to pull off. You have no credibility to convince people to invest in your deal. You have no credibility to take to the bank to get the loan. So, the first step is to build up some experience. Usually people do that by starting small with single family houses. Buy a few of those, get some experience. Do a 1031 exchange to move up into a small apartment building. Continue to invest your cash and keep scaling your business. Meet people. Some will have money. Develop relationships with those people. Eventually, some will want to invest money with you. Now you're in a position to successfully invest their money and get the bank loans to buy even bigger properties.
Now, recall I wrote that these investors are equity investors. That means they have ownership. New investors sometimes think "if I get investors to kick in $200K, and I borrow $800K from the bank, then I'll own 80% and they own 20%". Sorry, no. In this situation, the investors own 100% and you own nothing. In a leveraged investment, the equity investors own everything. Typically in a syndication the promoter will put in some of the money if they want an equity stake. So, you might put in 4% of the money, other investors put in 16% and then you get a loan for the remaining 80%. You now own 20% and the other investors own 80%. You get 20% of the profits and they get 80%.
This is no different than buying a house with a down payment. You put in the down payment and you own 100% of the house, even if there is a loan.
As the promoter, and often you would also have some company management responsibilities, you get to collect fees from the company. By management I don't mean managing the property, but rather managing the company that owns the property. So, you'll be able to collect that fee before the profit is determined. Its an expense for the company. If you do personally manage the property, then you would get paid the property management fee, too. But as far as actual equity ownership, those two management responsibilities rarely give you an ownership stake. It might be possible to convince the investors that you're entities to a small stake for being the promoter, but its going to be very small.
There's an additional wrinkle here. When you do this sort of deal, you are "selling securities". That's a highly regulated field. You do deals like this under "Regulation D". That lets you raise money for a deal like this without doing an "public offering". Its still very limited, though. In particular, you're limited to taking money only from people you actually know and have an existing social relationship with. You cannot make public advertisements. So, developing that circle of people with money is essential to making this work. Even so, you will have significant up front costs to do a deal like this. The legal startup costs will run on the order of $25,000 to do one of these private placements.
Jon Holdman
Thanks for the intricate breakdown!
I meant finding apartments for investors, which as you state is a syndication or private placement. This falls under what kind of entity I was trying to describe, sorry for confusing you. I am absolutely looking to raise the funds for down payments, marketing and operations to maintain until I strike an awesome deal.
The company is one that buys apartments and syndicates. How about being a affiliate for a institutional investor?
Thanks for sharing your knowledge
Great post John, I was wondering about this. A deal fell through that I was working on because the person (a friend) arranging the investors, me and another gentleman, wanted to have equal equity with us and had no money to put up. No dice for me.
I remember trying to raise money years ago and feeling that I was more important than the money. I learned quickly to, as my CFO taught me, Respect The Money! when asking for investment. Sweat equity is usually way overrated unless the equity is earned with performance. Also, now when I am the one investing I see how it feels to put your own money out there. If the deal goes south a non paying partner loses just time while the investors lose cash. Also, I believe that there are tax implications for the grantee when granting equity to a business partner that has not put cash into the business.
Lawrence B.
Hey, Did the person (friend) that is known as the promoter, perform to get the sweat equity he held he deserved. And I commend you for investing in multifamily, it provides many opportunities.
Happy investing
We never really got to the point of making an investment. Me and the other guy were ready to fund an LLC that would be managed by the friend. He would collect a fee as well as earn his equity over time to manage the company and bring deals to the table. He works for a local LARGE Commercial REI company locally so this work would be on the side for him. He just wanted too much equity up front for no money invested. I was willing to allow him to earn up to 10 percent equity that was based on appreciation of the buildings as well as rental performance along with bonuses for everyone based on yearly performance.