Proforma and Investor Returns

[Paul William Johnson]

Hello, Bigger Pockets world! 

My partner and I have a goal to buy 5 homes for long-term rentals this coming year in the Atlanta area. We are working through all the details now but getting stuck on the best way to payout investors. Does anyone have any advice on what worked best for them and if you have a favorite proforma that you use? 

Also if you're in the Atlanta area I would love to meet for coffee and discuss! 

[Tanner Sherman]

Paul, 

It sounds like you are raising private capital, so the first thing you are going to want to do is meet with a real estate syndication attorney to make sure you are doing everything correctly in order to not subject yourself to the wrath of the SEC. 

There are other legal structures that do not involve the business of selling securities, and a real estate attorney can help you set that up property in order to protect yourself. Problems arise when investors don't get the return they were expecting or the market shifts, and then everyone gets sue-happy. 

As far as providing returns, I think the best way is to structure your partnership like a large syndication, offering investors a preferred return of 6-8% before you see a penny. After that you split remaining cashflow anywhere from 50/50 - 90/10 with the favor going to the investors. 

You could also take investors on as debt- offering them a fixed interest rate whether the property performs or not until they recover their capital via refinance or sale of property. This interest rate would be negotiated between you and your investors but typically sits in the 10% range. They trade off is if your properties provide 25% IRR, your investors do not get the upside because they got the security of fixed rate return. In the previous example, the investors share the upside and the downside, but either way you are motivated to get the properties to perform as you don't get paid until they do, which is comforting to investors.