How much should an investor get?

[Raymond Berwick]

I’m looking to buy my first multi family. I think it would be best to have an investor. What is a fair percentage for the investor? I plan on finding the deals, doing any rehab that may need to be done, and managing the property. Has anybody been apart of a deal like this and want to share what then “cuts” looked like?

[John Wijtenburg]

@Raymond Berwick Congratulations on taking this step!

So many considerations go into structuring you offer. The information below worked for me in hotel deals, but it may be different with multifamily and the investors that you approach. Also, consult your attorney in putting the offer together. You may have SEC-compliance considerations depending on how you're offering the investment.

By the law of large numbers, if you go to enough investors, you'll find enough dry powder to fill your deal. That said, you have limited resources to focus more on the deal than the capital raising.

I like to start by reviewing similar offerings on CrowdStreet. They have an intensive vetting process and guide sponsors to the offer that would perform best with their audience.

From what I saw, most multifamily offerings have an 8% preferred return and 30-50% sponsor promote thereafter. This is a standard and simple deal structure that most investors are familiar with.

You can get more complicated by adding IRR hurdles to earn into higher promotes. For example, you may have an 8% preferred return, 80/20 to 15% IRR, 70/30 to 18% IRR, and 50/50 thereafter. This would align interests so that you get more upside as you perform better.

Regarding projected returns, most private investors like to see a combination of IRR, multiple, and cash-on-cash return on a five-year hold.

• IRR - internal rate of return is your compounded year-over-year return based on all distributions
• Multiple - all cash distributions (including return of capital) divided by the equity contribution
• Cash-on-cash - annual cash distributions divided by equity contribution

For value-add multifamily, you can probably be in the mid- to high-teens IRR, 1.5x-2.0x multiple, and 8-15% cash-on-cash.

Your cash flow projection will determine how these numbers shake out. That is, a strong cash flowing deal in a stable market may get all the IRR from cash flow, but a business plan that relies on heavy renovations may get more IRR from capital appreciation.

It all comes down to aligning the right investor to the deal. Some want current cash (think retirees) and others want value appreciation (think self-directed IRA investors).

Hope this helps. Please feel free to message me for specific clarification.