When raising equity capital, what return do you offer to attract capital?

Question

Would love to hear from people actively raising equity capital for deals and the kinds of returns you routinely project to attract capital. Would love to discuss the kinds of profit splits and preferred returns that work for you.

Jay Hinrichs · Answer

crap I just wrote a long response and the site went down so here is the crib notes.

1. ton of competition for investor dollars so investors look for highest returns and work backwards.

2. sophisticated investors look at returns as a function of risk.

3. less experinced investor tend to be bigger risk takers.

4. to raise money one needs verifiable back ground and a deal that is simple to describe.

Denise Supplee · Answer

Hi @Austin Fowler nice to meet you here on BP! My partner and I break down every deal from multiple angles. We look closely at how returns are projected, but also *why* digging into rent growth assumptions, expense ratios, debt terms, and exit strategies to see if they hold up in today’s market. We also stress-test deals for vacancy or interest rate changes, evaluate the operator’s track record, and compare projected IRR and cash-on-cash returns with similar opportunities. It’s not just about the numbers on paper -we want to understand the story behind the deal, the market drivers, and whether the operator’s plan aligns with realistic performance.

Stuart Udis · Answer

I believe that starts with where in the project life cycle the investment is made. The three most easily defined life cycle milestones/points of entry are: Entitlement;  Development & Stabilization & Stabilized. The risk profile should be reduced as each life cycle milestone is reached with the greatest reduction in risk once the stabilization occurs. Within each point of entry there's varying levels of risk: by-right entitlements vs. zoning relief; kitchen and bath and/or management upgrades to an existing building vs. ground up construction; C/D location real estate vs. A location real estate. Cost of equity capital should be influenced accordingly.

Other considerations that should influence cost of equity: GP track record; if there were heavy lift entitlements completed by the GP before capital partner entry; financing terms secured by the GP (often closely associated with imputed equity generated through entitlements); general market or economic conditions are a few to come to mind.

Mike Dymski · Answer

I don't raise capital but many that do look for a deal IRR (5 year) that exceeds 20% and provide returns in the teens for investors (this excludes 1-4 family stuff or new development).

Christian Osgood · Answer

Always go in the order of deal than debt than equity. Different deals will offer different returns. As far as cash flow or future upside, so you're investor profile will look different for each deal.

start with a deal, find the appropriate debt product, then you structure what partners are looking for. Common structures are preferred returns of 8 to 10%. If you're using primarily cash flow from the property, or doubling money in less than five years if rewarding investors out of a cash out refinance from a property with lots of upside.

anywhere between those two goal post can also work for example of 4% preferred return and a 1.5 X multiple at year three could be appropriate if that's what your deal is tailored to.

hope this helps

Juan Yepes · Answer

I'm not affiliated with this GP. I'm sharing what I am seeing in the market. The last deal I reviewed happened to be a 2 year hold period. I also highlighted the target returns and profit splits for more traditional 5-7 year holds that I have seen this year.

Chris Seveney · Answer

@Juan Yepes  - let me guess, you are affiliated in someway with this offering

Juan Yepes · Answer

@Austin Fowler I recently reviewed a 24-unit multi-family development in Miami with a 2 year hold period. Target returns of 20-49% IRR and 2.1-2.5x equity multiple. GP doesn't charge any fees, 7% preferred return and 35% promote.

For 5-7 year hold periods, I'm seeing target returns closer to 15-25% IRR and 1.6-2.2x equity multiple.

It's more common for GPs to charge fees (acquisition, construction, management, etc.) and take a lower promote around 20-30%. This GP is taking a more unconventional approach to help raise capital.

The preferred rate seems appropriate around 7% for small/medium size investors. Typically 8-9% preferred rates are required by large investors like Blackstone.

If you're looking for deals to invest in or financing for your deals I'd be happy to help connect you with some opportunities.

When raising equity capital, what return do you offer to attract capital?

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