Creative Financing

[Robert Williams]

Good afternoon bigger pockets

I am looking for feedback our advice

On a Financial strategy i'm looking at a 278 unit apartment building and also a second building with 363 units The financial strategy that I'm thinking of is finding private lenders to put up the down payment to get into the deal and then split the monthly profits with them until I can refinance the property to pay them their down payment back in full plus interest what is the pros and cons to this strategy?

Thank you 

[Jon Holdman]

Have you done that before?  Setting up a multi-million dollar syndication is a significant undertaking.  You can plan on something like $25K in legal costs to get the process in place.

Do you know people to invest?  Your options for any sort of public offering are very limited.  Most deals like this require you to only involve people you already know and have an existing social relation ship with.

What slice of the deal do you expect to keep?  How much of your own cash are you putting in?  New syndicators sometimes think they will find investors to put up 100% of the down payment, up front costs and operating capital and keep 50% of the equity for themselves.  Not going to happen.  Your percentage ownership is going to be determined in large part by how much cash you put in.  You might be able to keep some small slice in exchange for running the deal.  But potential investors will balk if they're putting in some percentage of the cash and getting a much smaller percentage of the ownership.

If you really mean loans, realize you're going to be paying a high premium for borrowed money for this very risky tranche of the funding.  At least low double digits.  Loans are typically structured with a fixed rate, not a percentage of the profit.  A split of the profit is more of an equity situation, as described above.

You will, as the manager of the deal, be able to collect management fees.  You are probably going to also have to personally guarantee any loans you take out.

This refi isn't going to be like a SFR where an appraiser can pull comps. You're going to need several years of operating reports to justify a new, higher value. And you will need to force a LOT of value into the property if you want to be able to refi and pay off your first round investors fully.