How to Own the Majority of an Apartment Building Using Other People’s Money

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What do you get when you mix a “value-add apartment building deal,” none of your own money, a preferred return for the investors, and a cash-out refinance?

Answer: YOU owning the majority of an apartment building without using your own money.

Moved a bit too fast for you? Let’s slow it down a bit.

Using a real-world case study, I’m going to show you how you can own the majority of a building even though your investors will finance the whole thing.

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The Set Up

Let’s assume you purchase a 15-unit apartment building for $530,000. You raise the $250,000 from 5 investors that you’ll need for the down payment, closing costs, and renovations.

This is a value-add opportunity because the rents are below market. You determine that the previous owner has not raised the rents in about 7 years because she didn’t want her tenants to leave. She’s currently collecting an average of $475 per unit but the median rents for similar units in that area is actually $600 – about $125 higher per month per unit. That’s about $22,000 more per year! At a capitalization rate of 8%, the prevailing cap rate in this area, that’s an increase in value of about $275,000!

So you know the upside potential is pretty good but you also estimate it will take 3 full years to get there.

There are two ways you can structure this deal with your investors: the first option is simpler and in the second option you end up being the majority owner of the building, even though you may not have any of your own money in the deal.

Related: The Book on Investing in Real Estate with No (and Low) Money Down

Option # 1: Straight Equity Split

The simplest way to structure this deal is to give your investors the majority of the equity. How much depends on what your target return is for your investors. For the purpose of this case study, let’s say that you will give the investors 70% equity for providing the cash investment with you retaining 30% for putting the deal together.

I have a sophisticated deal analyzer that I use to model these things, so I’m going to wave my hands a little bit for brevity’s sake.

What I want to do is to compare the compensation you receive as the syndicator vs. that in option #2 (below).

Assuming we sell the building after 5 years, you will receive 30% of the cash flow distributions as well as 30% of any profits from appreciation. If you add all that up, your total compensation over 5 years will be about $50,000, including a $41,000 check from appreciation when you sell the building.

Not bad for not having any of your own cash in the deal!

But there is an even BETTER option.

Option # 2: Preferred Rate of Return

Instead of giving your investors a straight equity split in their favor, you could offer them a generous preferred rate of return.

What’s a preferred rate of return? An example might explain it best.

Let’s assume you give your investors an 8% preferred rate of return. They invested $250,000 cash in the deal. The preferred return means that you agree to pay out 8% of their invested capital FIRST before any kind of equity split. In this example, 8% of $250,000 is about $20,000. This means you pay out the first $20,000 of available cash flow to your investors and then you split the rest based on your equity.

An 8% preferred rate of return is generous towards your investors. It means that they have a higher degree of certainty that they will make at least an 8% cash on cash return on their money. If cash flow is a bit tight, it could mean that you get paid nothing, but the investors do.

Investors are generally very happy with this kind of arrangement, which by itself represents a nice little return for most investors. If you offer them a small upside in addition to that, they would be thrilled! You could offer them 25% equity in this deal, which means that after they receive their preferred pay out, they get 25% of whatever else is left, either from cash flow or a profit at sale.


There is one major disadvantage of a preferred return for you as the syndicator: Your cash flow compensation will be greatly diminished.

Paying out 8% of invested capital drains the majority of cash flow, leaving you with precious little compensation from cash flow while you own the asset. Furthermore, the preferred pay out raises the risk. What if cash flow is not what you projected? Your obligation is $20,000 per year (almost like a interest-only loan), but what if there’s only $15,000 to distribute? That means you now owe $5,000 to the investors. Let this go on for several years and you’ll NEVER get paid anything, EVER, even when you sell because you owe all this money to the investors.

Therefore, use the preferred return cautiously, and only for investments with LOTS of cash flow to safely cover this liability.

However, there is one major advantage of this arrangement: You have 75% of equity in this deal, remember? While the preferred pay out is in place it doesn’t do you much good, because 75% of zero is still zero. But what if the preferred pay would disappear? That would increase cash flow and with that, your compensation.

How could we eliminate this preferred pay out? The answer is a cash-out refinance.

Related: 5 Things To Do When Apartment Building Deals Are Hard To Find (Like Now!)

Eliminating the Preferred Return with a Cash-Out Refinance

Instead of selling the asset after 5 years, we will instead refinance after 3 years (the time frame during which we added most of the value by increasing the rents), return most or ALL of the investors’ principal and hold the building for another 3 years (or even forever!).

Investors like this strategy because they get their principal back after 3 years which eliminates their risk. And they still enjoy 25% of all cash flow distributions and profits.

You like this model because the refinance eliminates the preferred pay out. Yes, the refinance increases the debt service, but it’s peanuts compared to the 8% you were paying out before.

If we model this scenario in a deal analyzer, we notice several things:

  • The overall return for the investors is about the same between option #1 and #2.
  • As we discussed in Option # 2, your compensation DURING the investment is much lower compared to the previous option.
  • But when you finally sell the building after 6 years, your profit is a whopping $118,000. That’s because you now get 75% of the appreciation you created by raising rents. Compare that with $41,000 in option #1, and you only had to wait one more year to get it. (BTW, if you were to wait to sell for another 4 years, your share of the profits would be $226,000!).


If you’re buying a value-add apartment building deal with other people’s money and you’d like to eventually own the majority of the building, then giving the investors a preferred rate of return and a minority stake in the venture is the way to go.

Once you’ve refinanced the building at a higher valuation, you’ve returned most or all of the investors’ principal and eliminated the preferred pay out.

The investors’ risk is off the table and you own the majority building. What a great way to build long-term wealth.

Nicely done.


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About Author

Michael Blank

Michael Blank’s passion is being an entrepreneur and helping others become (better) entrepreneurs. His focus is buying apartment buildings by raising money from private individuals. He’s been investing in residential and multifamily real estate since 2005. He is the creator of the Syndicated Deal Analyzer and the eBook "The Secret to Raising Money to Buy Your First Apartment Building".


  1. Are the loans from your investors secured against the property? If so, the primary lender has to agree to this and the investors get 2nd, 3rd, etc. positions on the property, correct? And if not, are investors comfortable getting 8% unsecured?

    • Michael Blank

      Hi John – the money from the investors in a syndicated deal like this are typically not a loan – they are “equity”. Equity is always secondary to any loans on the property. Are the investors comfortable with an “unsecured” position? Well, that depends on the quality of the deal and your ability to make the investors comfortable!

  2. Roy N.


    When you calculate your comparisons, are you discounting future returns? While 118K payout in six years is attractive, you need to discounted it back into today’s dollars to effectively compare to a stream of cash-flows over six years.

  3. Brooks Rembert


    As the investors hold equity in the property, won’t that allow them to put a lien on the home or other legal avenues should you not hold up your end of the deal?

    If so, it seems that would add great reassurances to a potential investor.

    • Michael Blank

      No, not a lien. The Operating Agreement (if you’re using an LLC) governs the agreement between you and the investors, that is the investors’ recourse. Some operating agreements allow the investors to “fire” the syndicator, for example. It depends how you structure it. It’s your job to make the investors comfortable with you. You can give them assurances but not guarantees. At the end of the deal people invest with you because they trust you. That, and because the deal itself looks good.

  4. Andrew Kniffin

    Thanks Michael. This is helpful.

    So the 8% preferred return obligation is retired when you repay the investor’s initial amount ($250K) at the cashout refi. But even though the refi retires this first aspect of the investors’ compensation, the second aspect of their investment continues and thus they still retain 25% of all cashflows?

  5. Ndy Onyido

    Hi Michael,
    Thanks for this masterpiece. It’s a perfect lesson for someone like me who is just starting out in real estate investing and I have learnt quite a lot from this article. Top on the list is the fact that one “nice” tenant can ruin your fun and throw all your projections out of the window.

    Secondly is the invaluable need for thorough due diligence prior to making any commitments-perhaps there could have been a way of knowing about the backlog of the TOPA filings….who knows?
    Finally, I have also learnt that faith and belief play a great role: all things work together for good for them that love God”- your wife was instrumental to this….and I share the same belief that there were lessons to be learnt and a reason why it turned out the way it did.

    Thanks again and please share more of this sort of article.. it has inspired me a lot

    One question though: which other US state has this TOPA law?

    Have a great day!


  6. Michael,

    When purchasing the property, are you doing it in an LLC?

    Also, when you refinance the property, whose credit is at risk and whose tax returns/documents will the bank look at?

    • Michael Blank

      Yes, an LLC (but check with your attorney about this. It’s the most common but not always right depending on the situation). Any financing you get will affect your credit of course, plus any co-sponsor you have in case your own personal financials aren’t enough.

  7. Daniel G.

    I understand that the preferred rate of return is eliminated after they are paid back their initial investment. But does the actual equity split change? Assume that at the beginning of the deal Limited Partners put down 80% of the equity and the Sponsor the remaining 20%. Until pay back the sponsor paid out an 8% pref and succeeded in paying back everyone’s principal through a cash-out refi.

    After this would the equity split between LP’s and the sponsor change to 50/50 due to a carried interest agreement? So after investor’s principal is paid back all cash flows would be distributed 50/50 in perpetuity or until the property is sold? I’ve also seen an initial LP and GP equity split of 95/5 change to 65/35 after payback.

    I’m structuring my first deal and these details are super important for my planning. I would appreciate your feedback.

    P.S. I own the deal analyzer and would love for it to have a sensitivity analysis tab as well as a cash waterfall assuming different hurdles and catch-ups. I think this would really take it to the next level.

  8. Paul Miller

    Hi Michael – great article. What about a Promissory Note secured by a second position on the property, behind the first position commercial loan? I guess this may work for a single second position but may be a challenge with multiple seconds. I’m trying to provide a great and secure return with out the need for a PPM through an LLC. Thoughts?

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