Help structuring a deal

1 Reply

Hi All,

I have been trying for sometime now to drum up some investor capital to be able to purchase a multifamily apartment building in FL. The problem is that being new to investing in multifamily buildings I am having trouble selling my deal to them. At first I thought it was just my experience which I could understand. As time went on I was wondering if it was perhaps the way I was structuring the deal that was the problem. 

So the deal is for $1,200,000 purchase of 21 units. I am asking for an investment of  $300,000. Generating gross operating income $190,000 with $80,000 expenses leaving $110,000 after taxes and interest left with $60,000 profit in the pocket.

The way I am structuring the deal is that If the investor puts up $300,000 they will have 85% ($50,000) of the profit and being that I will be doing the day to day managing of the deal 15%($10,000) per year. 

I have in my business plan revenue increasing methods (market rent, Washer dryer in room) as well as the rehab of units starting year 2 to increase rents. The deal at this stage is structured on a 5 year investment with a potential to stay in the deal for another 5 years.

Am I taking to much of the profit and therefore putting potential investors off the deal?

Am I not showing significant returns to warrant an investment?

Is the deal and the deal structure ok just that because I am new peolpe dont trust me enough?

Any help about my current situation would be greatly appreciated.

Cheers

Gary

Gary, the first thing any investor wants is the return of their money, then a return on their money. Saying 85% of profits could give them $85.00, as there are many ways to hit an operation with expenses and such cash from it. 

Financials need to show sufficient cash flow, paying obligations in priority, financing, taxes, insurance, investor's principal contribution, operational expenses then allowances for maintenance and vacancy.  Then you get to profits to split, your portion should be last and include your management fee as that will be seen as a performance based earnings. 

I assume you're making up the difference on the purchase price and asking for one investor partner. 

My next issue would be, is this newbie paying too much for the project? Someone with a vested interest in a project can give me their opinion of value all day, I'm not banking on it. I'd want to see an appraisal by an MAI appraiser! That will be a chunk of change from you. I'm also assuming the investor is not an RE expert, perhaps they have knowledge, but they may also have little knowledge of multi-family operations. Which goes to the next concern;

Your experience? 

This isn't that small of a project, running 21 tenants! And you have no experience, should I put up $300,000 for you to learn the business? I don't think so. That means you have the management bases to cover with a good PM. That also means a management expense. Your best deal on this end would be to get a manager that will allow you to do some of the management functions and cover expenses such as advertising, to reduce their fee. Otherwise, just assume you will pay for management. As you gain experience later on, you might adjust the management arrangement to your advantage, but not until you can convince the investor that you can do the job.

The investor: 

Who are you fishing for? A book could be written on this alone, actually several. My rule of thumb at this level is 1. An accredited investor and 2. one who has ten times the contribution amount, that's $3,000,000 in available, liquid assets, not necessarily cash. Asking an investor for half of their available funds on this deal with you will be tough to sell. As that ration decreases the investor's knowledge must increase. Meaning if that investor can step into your shoes and take over the project, they might be comfortable with sinking half of their available assets into the project. 

Investors will tell you if they are accredited, but they won't be showing financials to you on a deal like this IMO. Investors are just like other tire kickers too, they may act interested just to see the deal but not have the cash to allocate to it. You need to gauge the size of the fish before throwing out the line. I'm saying, be selective on who you show the deal to. 

Ask why an investor is passing on an opportunity, they may very well tell you the truth. They may not want that size of investment, ties up too much cash, they may say it's management concerns or they don't like the property or location. You won't know unless you ask. 

At 15% I don't think you're being greedy, but see if it works for you at 18%. Consider a sliding scale, 20% for 2 years, 18% years 3, 4 and 5, this is a "front end load" that makes up for the lower profits in the beginning but as you improve the property and cash flow they can still make more at a lower rate in profit shares. 

I also think you are elephant hunting with a .22, not a BB gun, but still under powered for the size of the project to start off with if you don't have RE experience, and that too can make investors gun shy. Rework the plan and good luck  :)

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