Are these reasonable investment terms for a broker/manager?

[Steven R.]

I'm considering a deal I've been offered by someone I trust but whose terms I'm not so sure about compared to norms. Would like to get some guidance on what others have seen.

This guy owns a property management company and manages several hundred units in the same couple neighborhoods. He knows the area well so he also finds multi-family properties (20+ units) that he thinks are good investments, then will offer it to one of his children and a partner of their choosing. I'm that partner. From there, this guy then also uses his own PMC to handle all aspects of property management.

His terms are as follows:

• 1% of the deal goes to him up front as an acquisition fee

Then on an ongoing basis, he gets a cut of net proceeds, defined as a % of the total amount positive cash flow going into our pockets after all expenses, mortgage, insurance, etc. are paid.

• The first 6% go straight to the investors
• Next 6% are split 70/30 favoring investors
• Remaining 88% are divided 60/40 favoring investors

He also takes a modest property management fee:

• 4% of gross rental income

Based on our financial assessment of this deal, including all of the above investment brokering + property management fees, he'd essentially be getting 13-14% of gross rental income.

Finally, he gets a piece of the action when we sell the property:

• Net profit (sale price - investors' down payments - outstanding amount on mortgage) is divided 75/25 favoring investors

How common is this structure in the industry?

We're looking at a 20yr $190K at 5.25% with 25% down. Based on the income statements I'm looking at and our expected cash flow with all of the above fees factored in, we would break even in ~7 years, and also anticipate some appreciation in this area.