Just bought a 140 unit property. Here’s how I financed it (thanks BP!)
It’s always exciting to buy an off-market multifamily property, and even more exciting when the Houston Business Journal runs a story on it!
The property is a 140 unit class-C apartment complex in the Houston Texas market. The deal was financed with a $4 million loan from a national CMBS lender, and $2.3 million raised from a private offering (Reg D 506). I've got to give credit where credit is due, some of this money originated from contacts I met right here on BiggerPockets. If anyone doubts that BP can help you accomplish your goals, I hope you are a believer now!
I got the deal off-market from a broker that I’ve worked with before. He knew a seller that needed to sell right away and wanted a buyer that they knew would perform. This is why I’ve always stressed that track record means a lot in this business. It is your track record that will get you deals, and it is your track record that will help you raise money to pay for those deals.
I frequently get asked about the costs to purchase a deal of this size. Many newer investors underestimate the capital required to do a deal like this and get caught short. Since running out of cash is very unforgiving, here is a synopsis of what to expect (using figures specific to this deal but at least it gives you a general idea):
$10,000 entity formation, operating agreement, PPM and subscription agreement
$40,000 loan fee
$21,000 closing costs
$16,000 in due diligence costs (reports, etc)
$17,500 legal fees for the lender
$5,000 legal fees for the buyer
$20,000 utility account deposits
$45,000 prepay first year’s insurance premium
$40,000 fund lender’s impound account
$600,000 for capital improvements
In addition to the above, don’t forget cash reserves!
Thank you everyone for allowing me to be a part of the BP community. I look forward to sharing more success stories in the future, and I’m sure that this forum will continue to play a role in that success.
@Brian Burke thank you very much for the quick response and for such a valuable feedback. I'm going to use your IRR's benchmarks as a guideline and then make any adjustments according to the particularities of the deal. As you pointed out, there are other non financial considerations as well, such as the experience and track record with similar deals, that are equally or even more important than the rate of return. After listening to your interview on Podcast #3, I decided to partner with a successful group of developers in a effort to create a team that can project credibility and build trust with potential investors.
I know that even trying to cover all aspects, it is not easy to build trust and raise private capital and that's the real challenge, but having guys like you that have done it and are able to share the way they did it, makes the path a little easier.
I'll keep you posted and if have any other questions I'll contact you. Thanks again for your willingness to share your insights and keep up the good work!
This may be a total newb question but - is the 8% hurdle an annual thing? In other words, each year the investors get 8% return on their investment before it goes to 70-30 split? Or is it a one time hurdle such that once the investors hit 8% on their investment the first time the deal is now 70-30 going forward?
E.g. 100,000 investment from investor.
Yr1 NOI of 9,000
Investor gets $8000 + 700 (8% plus 70% of amount over 8%)
Sponsor gets $300 (30% of amount over 8%)
Yr2 NOI of 9,000
Investor now gets $6300 (70%)
Sponsor gets $2700 (30%
Yr3 repeat of Yr2 and so on...
@Bill E. the hurdle is annual, so in your example year 1's calculation would repeat in year 2 and so on. If the NOI in year 1 was 6%, the 2% shortage accrues into year 2, thus if year 2 income was 10% the investor would get it all--their 8% plus the 2% that they didn't get the previous year.
I find this very interesting because creating an REIT and buying apartment complexes has always been a strategy I liked.
I'm curious what you believe your potential profit will be by the time you sell this property at year 5. You definitely know far more about this than I do at this stage and have relationships I would have to develop and I'm wondering what kind of return there is on this type of investment.
I'm an experienced Internet marketer so I've always figured purchasing under-performing apartment complexes and then fixing and marketing them for higher occupancy would increase the value of the complex - so at that point I could sell it or just hold it for the cash flow.
@Bill E. We have a different take on the preferred return strategy. The distribution is set up with a 70/30 split, unless the 70/30 split would result in less than an 8% return to the investor. In that case the investor would receive the first 8% and the sponsor would get the next 3.43%(70/30 split). Once the split has reached the 70/30, it continues to the end of the year and then starts over. So in your example
year 1 investor receives $8000 sponsor receives $1000.
Same for year 2.
Now in year three NOI is $11,000. A 70% share would get the investor 7,700 which is less then the preferred return, therefore the get $8,000 and the sponsor gets $3000.
Jumping to year 4 and an NOI of $15,000 a straight 70/30 split will exceed the preferred return and therefore the preferred return does not apply.
$10,500 to the investor and 4,500 to the sponsor.
congrat@burke may you continue to reap the fruit of your labor, has you watch your investment flourish.amen. what will you advice someone like me that is very new to this business and as someone who has a burning desire to make it in the real estate world.
@Christopher Dittemore investors should expect to see returns in the mid to high teens on an annualized basis which is partly comprised of periodic cash flow and partly of gain on sale. If the gain on sale is in the range of $1MM to $1.5MM as expected, I should do pretty well but I don't count on making anything until there is a check with my name on it after the property has sold and investors have received their principle and their share of the profits.
@Austin Rabiu my best advice is to start developing a track record. You are unlikely to start with a large property for your first deal, but that doesn't matter. Any successful deal will show what you can do.
I'm a little late to this post, but found it very helpful. Thanks and congratulations.
As a new investor, one question is the strategy/logistics of finding the deal and cultivating/raising funds with investors. Given a typical 30 day due diligence period and 60 day financing contingency, I assume you wouldn't spend the money on a PPM until the DD period was complete since 1) you're not sure the deal works and 2) you need the information to complete the PPM for prospective investors. Given that timing,it leaves less than 60 days to raise the money. How does one navigate the timing if you don't have a ready investor list ( I do have a list of prior relationships with potential investor-but haven't done a deal with them yet)? So do you find the deal first, then the investors, or a little of both?
Thanks for your posts.
@Zach A. As I am at the tail end of a 62 unit acquisition with a ppm, I can give you a few pointers. Network, network, network and meet as many potential investors as you can. Finds out what their investment interest is as far as risk/reward. Types of property, location, size. This may effect your property selection process. Start the ppm early. If you change properties the ppm can be modified.
Of course while you are doing this you are looking for properties and building you team.
As someone new to mid to large mf you are better off teaming with someone with more experience on the first couple deals. After that you will have some credibility.
@Brian Burke , I have read this post at least 3 times. It was not only a good job on putting the deal together but stressing that it wasn't your first deal. Just like any business you start down low and work your way up. you reputation makes a huge difference in how fast or how far you go.
@Zach A. Jeff is right on the money with his response. You need to build a list of capital partners long before you have a property in contract. If you have a deal in contract it's too late to be looking for money, there just isn't enough time. As you build your list of investors, you'll get a sense of how much money you could reasonably raise on short notice, and that information will dictate your shopping patterns when you are looking for property. Just remember to size down your price range because you'll never raise as much as you think you can. Someone on your list will say no when the rubber meets the road, just be prepared for that.
I don't pull the trigger on a PPM until the property has passed due diligence, but I do write my own informational summary / prospectus immediately to give my investors the information that they need to make a decision on their level of interest. Don't confuse the PPM with a marketing document. They are two different things. If you use a PPM to market your deal you'll have a hard time raising money. The PPM is the disclosure document. It is designed to give your investors all of the reasons NOT to invest in your deal.
Finally, I want to point out that raising money requires a track record. Sophisticated investors don't invest in "great deals", they are offered those all the time. They invest in great people who have compelling investment options that align with their goals and risk appetite. This means that they invest in YOU and that is why you have to build your relationships before you go shopping.
@Jerry W. thanks for the compliment...you are absolutely right that reputation is everything in business, a fact that is amplified when your business involves the placement of other people's money.