How to get investors to go in on deal(s) with you....

Question

What does a contract/agreement look like when an investor(s) go in on a deal with you and you don't have any of your own money involved... Please excuse my great ignorance in this topic. I have a couple rentals now, but small scale and want to know how I can get into the big deals with little to no monetary investment.

Say I find an apartment complex for 5 million and need to put 20% down on it and have investors put in the down payment. How do they get their investment back with interest and you still profit from the deal? I know I would be able to understand it a lot better if I had an example.

Allyssa McCleery · Answer

I would say in your situation your best bet would be to find a syndicator in your area and try to learn as much as possible from them and find ways to add value to their business. You will gain experience in structuring deals and systems to create leads. I am getting started in this process of syndicating as well but I intend to invest alongside cash providers initially and give them a larger portion of the return in order to create the relationships/reputation needed to build up into bigger deals. The advice I have been given is that investors want to feel most comfortable with the syndicator before they vet the deal. If you haven't already I would recommend reading Raising Private Capital to give you a better idea. Also, on an apartment complex 20% down is rare. The lenders I have come across want at least 25% up to 40% but there are also "hard money" type loans for distressed apartment buildings which will lend up to 90% of the purchase price and rehab at a cap of 70% LTV so you would have to find a significantly undervalued property to get these terms.

Brent Shields · Answer

My advice is to find someone who is doing what your thinking about and then copy what they do.

No sense in reinventing the wheel.

If you can't find anyone doing it then there is probably a reason for that, and that's not where you want to start,

you can do deals that no one else can do after your an expert at it.

Taylor L. · Answer

Good guidance here already. I would add:

When you're bringing in investors who do not have an active role in the operation of your business, you are selling a security. That means you must comply with securities laws, and do a syndication. That means lawyers (the good kind who help you make money, though)

Regarding an example of how returns are made:

First off, for the investors: Generally, there is somewhere between an 80/20 to 60/40 ownership split, investors/sponsors. There are always outliers. I heard of a 90/10 recently.

Typically your investors will expect a preferred return of 7-8% on the cash flow. Basically, this means the investor makes 7-8% first from the cash flow, after which it's split between the investors and sponsors. At sale the return will be divided based on the equity ownership mentioned above, after investors receive their initial capital back.

For the sponsor: You can get paid MANY ways. Acquisition fees, asset management fees, and disposition fees are the ones I see most frequently, in addition to the cash flow splits mentioned above.

Most deals these days are value add. That means you buy the asset, raise the Net Operating Income by cutting expenses and/or growing revenue, and selling the property later for more, hopefully while making money off of the cash flow as well.

There are no hard-and-fast rules about what equity splits and preferred returns you should offer (if you even want to offer a preferred return). It's all about what investors are looking for right now and what they'll accept from you. Typically newer syndicators have to give more equity and return to investors.

In my opinion, it would be a good idea for you to meet experienced syndicators and get on their deal distribution lists, just so you can see what's out there and learn from observation. Success leaves clues!!

I would also recommend picking up Joe Fairless' Syndication book. Lots of great information in there. Attending events and meeting experienced people will be worth every penny if you're dedicated to the business.

I'm happy to talk offline if you like, just shoot me a PM.

Theo Hicks · Answer

Hi Garrett,

There are a lot of posts on BP that discuss the LP compensation structure for syndications. The most common is an 8% preferred return and a 50/50 profit split. But it is completely negotiable.

One thing I would add is that you will have more success raising capital if you invest in the deal. That way, you have skin in the game.

Charles LeMaire · Answer

I see many suggestions on this and many other posts about finding a local mentor.  If you have one, have all the investor contacts (money), have a team, have properties, etc., you don't need what I am suggesting.  But if you don't have everything, consider a mentoring group!

On March 9th & 10th (2019), about 700 persons will attend Brad Sumrok's Rat-race 2 Retirement (R2R).  Over the two days, he will give a great overview of how a person(s) can become deal sponsors (GPs) and have other persons become passive investors (LPs) in MF deals.  There is a bus tour to visit some example MF properties so you get a better understanding of what you are investing in.  Deals are typically 70+ units (to about 450 units), typically B & C class.  Minimum investments are typically $50K to $100K.

And YES, there will be a sales pitch at the end of the second day - Brad is not a charity.  If you join the Eco-sphere (I call it Sumrok University), you visit more properties and attend networking events where GPs and LPs network in a "target rich environment".   GPs have help finding deals and preforming due diligence.  Funding is easy as there is a pool of LPs.  It just works!

Brad has students, both GPs and LPs, from all over the country (and Canada).  MF deals have been done in 10 or 12 states.

I started with Brad in 2010.  To date, I have entered 43 deals, 12 have sold.  Most are in TX, but I have b 4

I know there are a lot of "never pay for mentoring" folks on BP.  If you have another path that allows access to the needed components, great.  But if not, it is a way to get access.  I have found Sumrok University to be invaluable in my path to RE.

NO, I am not a Sumrok employee, he does not pay me!  I am a student of his.  I appreciate what he has done for me and I volunteer at his events.

Regards,

Charles LeMaire

Gwyeth Smith · Answer

@Garrett Blanchard, depending on what you are bringing to the table, you may be able to get in on the general partnership side of a syndication through an existing program.  I don't have first hand experience with it, but Michael Blank has a deal desk where you can either bring a deal or raise money.  Either would get you in on the GP,I think.  Check out www.themichaelblank.com.

Luke Miller · Answer

@Garrett Blanchard you're talking about a couple different things, but you should probably look into syndication. It's regulated by the SEC and that's really not something you want to mess around with. You most definitely will want to engage a syndication attorney and they are expensive so make sure to factor that into your deal.

In your example, your investors would be on the debt side, but more common would be the equity side. Feel free to shoot me a message if you have any questions or need some resources.

Jack Medford · Answer

I agree with @Allyssa Mccleery in that this sounds like you're heading down the road toward syndication. I would suggest learning everything you can about it first to see if it is the right fit for you. Joe Fairless has a Syndication School, which consists of podcasts detailing the various aspects of apartment syndication. Theo Hicks is a pretty consistent contributor on the BP forums, and he is the actual host of the podcasts, if I'm not mistaken. Maybe try reaching out to him directly to get some advice beyond just the podcasts.

Caleb Heimsoth · Answer

@Garrett Blanchard. For your example youll need an attorney

How to get investors to go in on deal(s) with you....

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