Mu husband and I have a friend who has offered us an opportunity to buy into an apartment complex deal. This project would be a new build. Our friend has several multi-family and other commercial real estate projects. My husband and I own 3 single family rentals and are looking for a way to jump into the commercial side. What questions should we be prepared with when discussing the apartment deal with our friend?
@Brianne Dylla , hi and welcome to BP!
There are a lot of questions, so I'm only going to talk about some of what I believe are the more critical ones:
1) How much experinence does you friend have in apartments? You did say he has "multifamily units and other commercial property", but what does that mean? Multi-family can be a duplex. Commercial can be a small store front. That is a whole different ball of wax than building a 200+ unit apartment complex from the ground up.
2) How big is the complex? Again, as in #1, the size and scope of this project may be a 10 unit or 200 unit complex, and while those are both "apartments" they are two totally different worlds in terms of financing, lead times, marketing, managing, etc.
3) What other investors besides you and your friend are involved in this deal, if any? Will is be a syndication, a limited partnership, a multi-member LLC, etc?
4) Are you only investing money or will you be performing any duties like design, contracting, managing, etc?
5) Is there a clear scope of works, or is this idea just being kicked around? In other words, if you say, "Yes", how soon are the backhoes breaking ground?
6) What are your experience levels with construction? Ground up building is a whole different animal vs. rehabbing existing structures.
7) How is the property and constructions costs being financed: cash only, construction loan, conventional bank financing, multiple partners?
8) Have you got a partnership agreement in place that covers the 6 D's: Drugs, Dementia, Disinterest, Divorce, Dissolution and Death?
9) What is the time frame of the project? 6 months, 18 months, etc. How will the carrying costs of any financing be handled? Who is managing the timelines? What happens if timelines aren't met?
10) What are your exit strategies from start to finish: If things don't go according to plan, how do you get out? If things do go according to plan, when do you get out? This is probably the most important thing.
Thank you so much for your time, responses below:
1) He currently owns a (2) 20 unit apartment complex, a few single families, and leases out store front space. This will be his third from the ground up new construction of a 20 unit apartment complex.
2) 20 units
3) At this time it is just the two of us, I would buy-in a small percent, not sure the structure yet
4) only money
5) The idea of me being part of this deal is just being kicked around. He will do the deal with or without me, it is moer of a helping hand to let me join, but I want to be prepared and do my due dilligence
6) My personal experience with construction is minimal
7) I assume loan
8) If this is standard I imagine he will bring this up
9) I have a meeting this week to review the project with any real detail and would have better insight on this after that meeting
10) This is currently on my list of questions and yes I agree very important
all good questions above, what's your location?
Too many questions to list!
I would recommend talking to an experienced operator that knows more about your market. It would be helpful to jump on a call so somebody can fully understand your situation.
I would also recommend reading books about multi family investing to get you started!
@Brianne Dylla , #8 is absolutely important, whether or not it is standard. We who have been in this biz for awhile joking refer to this also as "6 things that kill deals, ruin people, and destroy friendships." Think about every partnership story you've ever heard that went badly, and I guarantee one or more of those six things was to blame.
Don't count on him to bring it up. Some people are unrealistically optimistic and figure they are immortal, everyone likes them, and that the sun shines every day. This is CYA time. Unfortunately, people don't like to talk about it, so they skip it and say, "We'll figure it out later." Then someone gets in a car crash or their spouse leaves them, and then we get posts on Bigger Pockets like: "Getting out of a nightmare partnership!"
Seeing your answers, this doesn't really sound like a partnership which is what I assumed at first since you used the phrase "buy into". You, a novice (nothing wrong with that), are being asked to provide a small portion of the funds needed to make this deal work for someone and won't be involved in the day-to-day or even monthly management of anything. There's no reason to be a partner. Rather, this sounds to me like you'll be a hard money lender. That's good in a way if it's true because it keeps you out of any messes that are standard in partnerships, and the worst that could happen is you lose your investment if any of the 6 Ds torpedoes the deal.
For what it's worth, I agree with @Erik W. Nothing wrong with being a lender or investor, but if your true goal is to learn, then you would want to be more involved. @Justin G is also correct. Learn as much as possible through books, seminars and BP. Then see how all that really works in the real world on a deal that you have some involvement with (and hopefully, paired up with a competent PM).
Once you spend all that time learning, you will be much more confident in your decision to pursue a deal.
Knowledge always builds confidence.
Thank you all for your insights.
I agree with @Justin G. . Apartment investing can vary significantly depending on where you are. If you wanted to surf through Biggerpockets for any general partners who are in your market, or comment what market you are in, I'm sure someone in your area could give you some insight or someone could refer you to a GP who would be able to help.