Hey everyone! I'm trying to buy two multi-family complexes and have a few individuals who have committed to giving me private money to fund my down payments. The two opportunities I'm working on right now are a value add (110 units, $4.3M purchase price, $330K in rehab costs, and will need roughly $1.2M at closing). The second is a buy and hold opportunity on a 15 unit complex. (roughly 900k purchase price, and $190k needed at closing).
Does anyone have advice on how to structure the private money as a portion of the deal? Does it make sense to do it as a separate debt sleeve or will i need to give up equity and a % of the cash flow each month? I'm sure there are thousands of ways to do this, but I would love to hear what others have actually done.
Thanks for your help!
Hi @Mitch Hohlen ,
The project you're describing is ideal for a syndication. I don't know how familiar you are with the syndication process...
Are you asking for splits and fee structures? Or are you asking what options you having in structuring the deal, ie syndication, partnership, etc.
When syndicating, you also need to abide by SEC regulations. Are the investors accredited or family & friends?
Hi @Seth Ferguson -
Thanks for your response. I'm asking about fee structure / splits. I am familiar with the syndication process, but since we will be limited to 3 total partners, I think it makes more sense as of now to go the partnership route.
Both investors are accredited and qualified purchasers.
Like Seth said, deals of that size will generally be syndicated. Depending on how you are doing the deals and how many investors are involved you may have to syndicate the deal since it wouldn't qualify for a JV (joint venture). If it is just you and one or two other investors and they are all active. Then doing a joint venture would be fine.
Feel free to DM me if you have any questions and I'll be happy to help.
@Mitch Hohlen It will also depend on the amount of risk the investors want to assume. Being on the LP side affords them certain protections a partnership does not.
In a typical value added multi family syndication where there are a lot of investors putting in a relatively small amount (maybe $25,000-$50,000) the preferred return will be anywhere from 5 to 8%. The split will be anywhere from 75 to 85% investor/15 to 25% sponsor. The more money you expect someone to put up, the better terms you will have to give. So to be competitive, you would need to do better than that for your investors who are putting in more.
If the people bringing the money don't have an ongoing active role in the deal, it is a syndication. You will need to work with a securities attorney on that deal.
In regard to returns and profit split, 8% preferred return with a 70/30 profit split is common on value-add deals. You could also put in a hurdle (for example, once a 13% IRR is achieved, the profit split goes to 50/50).
@Mitch Hohlen You can certainly syndicate, but there is a way to go the partnership route if it's only three partners. Will the partners be the same on both deals? Technically, if they do not have an active role, it should be treated as a security, so they need to have an active role if you go the JV/Partnership route. In this scenario you would need to bring them on as equity partners. For splits, this depends on the roles, but I'd suggest asking the partners/investors of their return expectations and go from there.
If you want to pursue the passive investor role with a debt position, you should consult an attorney on their best recommendation. I just interviewed an SEC attorney on Friday and she mentioned that there is more flexibility if you only have 1-2 accredited investors on a deal, but I would proceed with extreme caution if this is the route you take.
As @John Casmon suggested there're options here with only two private investors and you must certainly consult a securities attorney on such. However, in addition to that start our with these two potential partners of yours and ask them as to what they are looking to gain from these investments.
@Mitch Hohlen I believe you are looking at two possibilities here: syndication and JV.
For JV, each partner have to be active and have a defined roles/responsibilities. If that is what you and your partner are looking for I would suggest that you consult an attorney to properly define roles of each partner in this deal.
If the partners would like to be passive, it should be treated as syndication and discussed with SEC attorney as mentioned by many above.
@Mitch Hohlen just wondering what did you end up with. I am considering bringing in some private lenders and wanted to see some examples of how these deals can be structured so I dont short change the investors while not leaving money on the table for myself. Same question to anybody else - looking for examples / templates of deals between multiple private funding partners. Is it typical to give just a straight ROI or a % of equity or both and for how long would they get equity? Lastly how are the taxes done for each investor..... maybe this should be a discussion on it's own....hummm
Just found part of what I was looking for:
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