1st Apartment Purchase Questions - 24 unit

[David Toupin]

Hello BP community!  

I am looking at a 24 unit apartment building currently.  All of the numbers work, and I am ready to move forward.  I don't have the funds for the down payment and I am talking with a few investors currently about investing with me.  It is listed for approx. $650k.  I am looking to raise about 80-90% of the down payment from investors, and I will be putting down the rest.  

My questions today are:

1. How do I structure my company to split this investment with the other investor(s)? I will form an LLC for the property. How do I split the share in the property? Lets say for the sake of this discussion we will be splitting 50/50, because I will be doing all of the work on the property. Should there just be an operating agreement that splits the profits for this company? I am looking into additional properties as well. Would I then have a holding company that has all of my potential properties including this one under it? I want to have my company structured correctly from the get go.

2. What is the process for purchasing an apartment complex?  From what I know it should go like this: (Let me know if there are any other tips/details I should know of)

-Negotiate offer

-Send written agreed upon offer with due diligence and financing contingencies (typically 60 days)

-During due diligence get further info from seller (i.e. financial statements.  I already have the past two year 8825 forms) 

-Get building inspected

-Finalize financing

-Revisit the price if necessary based on inspection and new information found.

-Close on deal.

Sorry for the long post!  Thanks Guys!

[Joshua Nicholas]

1. So many different ways to do this. Some guys offer a preferred return (a % return on investor money before you participate in any profits), some people do a straight split on equity (IE 80/20 investor/sponsor split where cash flow, refinancing proceeds and sale proceeds are allocated according to equity stake), some combination of the two, etc. 

Honestly just figure out the absolute minimum your investors need to make to be happy then under-promise and over-deliver. If they need to make 7% cash flow to be happy and you know this is gonna make 12% returns, then promise them 7% and let them be pleasantly surprised when their portion is 9%.

There will be an operating agreement for the LLC and you'll probably need to get some PPM documents drawn up unless you know these people really well. The operating agreement will spell out all the stipulations for the partnership, how cash flow will be allocated, management fees (if any), how the partnership will survive if one of the managing members dies, what do to with members who want to sell their interest in the LLC, etc.

As for company structure, each property will usually have it's own LLC, also known as a special purpose entity. Your main structure, let's just say David Toupin LLC, will probably own your shares in each property. (IE, David Toupin LLC owns 25% of 123 Main Street LLC, 25% of 123 Elm Street LLC, etc.)

If you buy 123 Main Street, fix it up and re-sell it for a profit, then 123 Main Street LLC will be dissolved, all the cash will be divvied up among the investors and you move on to the next deal but David Toupin LLC is still standing.

2. In NY the process is:

Write offer

Sign contract with 5-10% deposit (This is where you have the deal locked up.)

Due diligence, appraisal, inspection (I've never seen an investor supply financial statements honestly, usually just tax bills, rent rolls, oil/nat. gas bills and insurance.)

Assuming everything checks out, you're clear to close.