How do I split the profits when I raise money and manage the property?

Question

Hello,

I have a $2 million deal for 34 units that is roughly a  9 cap with upside if I bring the rents up to market.

I need about $400K and some reserves to close the deal but I only have $100K line of credit.

I think I can find people who will invest to come up with the rest, but how do we split the profits? I have 10 years of real estate experience as a landlord and the investors have no real experience.

As I found the deal and will manage everything, I should get more than 25% even if I only put in that much money.  Should I hold my money back as the reserve fund and try to raise all the money and ask to split the profit 50/50?

What is typical? How are other deals structured?

Does anyone have a sample in writing I could look at?

Thanks in advance!

Toben B. · Answer

So far I have people who want a part of the deal. No one wants to just loan me money.

Josh Eitingon · Answer

@toben B. you have lots of options.  At the highest level you can either raise debt (basically borrowing the money from your investors) or equity (the investors become part owners in the property.)

Debt is obviously simpler and it allows you to retain ownership but, investors may not be interesting in just lending.

With equity, I will take fees in 4 ways

1- acquisition fee for putting together the deal paid at closing

2- asset management fee: between 1 and 3% of gross rents paid monthly for my day to day management

3-share of cash flows (usually between 10 and 30%)

4-share of cash flows (usually between 10 and 30%)

**Your 100k would be treated as an investor dollar alongside what your investors put in.  The 4 points above would be regardless of personal investment.

You can get super creative which is why private money is great.  If I were you I would try for some form of debt/ equity arrangement to be able to retain as much equity as possible.

Hope you don't mind me getting specific with what I have done in the past.  Probably too much info :)

Arlan Potter · Answer

I would only proceed if I got seller financing and any other folks you get for the $300,000 will loan you the money. The investors get a monthly interest check or interest and principal.