Buy and Hold Investor · Knoxville, TN · Member since 2013 · 450 posts · 270 votes
I was talking to my brother about apartment investing and he asked a question I want sure of the answer. Say I bring in a partner on a deal and they bring, say, the 20% down payment for a purchase, and we split ownership 50/50. When we sell the asset in like 10 years, do they get their initial investment back first before we split the profits?
For example, we buy an apartment for $1,000,000 and they bring $200,000 for the down payment. Then we hold it some number of years and then sell it for $1,500,000. Does the partner get their initial $200k back then we split the remaining $300k half and half or do we split the $500k half and half?
I think this is all negotiable but what would a partner typically expect?
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
10y
@Chris Eaker Great advice from very experienced people. Invaluable.
Returns are influenced by supply and demand - supply of capital and supply of attractive investments. The General market's demands (as people have written here) are likely to be different than those of family/friend money. When you're talking ad hoc projects and friendly money, it really all is negotiable.
I have friendly money that I've let co-invest with me. I don't want to take advantage of them, but the reality is they'd be happy with much lower returns because their alternatives are limited. The terms I've set are fair to both sides. This may be the case with your brother as well.
Personally, I structure these as a preferred return on capital, then 75% to Class B (capital investors) and 25% to Class A (managing partner). Mgmt costs expensed.
So, to answer your question, your brother receives some preferred quarterly return on his capital. When sold, the waterfall looks like:
0. Repay any debt; close accounts payable.
1. Return everyone's capital.
2. Make sure the preferred return is met.
3. Whatever's left gets split 25/75 to you/him.
If you want more current income, add a mgmt fee and tweak his preferred return or equity split more in his favor.
Books are great on this subject. Also great to see what people are actually doing today is grabbing a double espresso and reading some of the LLC membership agreements for the investments on the various crowdfunding sites. That's really where we're headed.
Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
10y
Everything is negotiable, but what you're proposing would be VERY unattractive to most passive investors, esp. given that by your questions I'm going to assume you have no track record in MF. But, there's plenty of suckers out there, and I've seen bad deals get funded by less demanding investors than me.
Let's say I was willing to invest w/ you. I'd demand 100% of the equity (assuming you're not investing any of your own capital), but pay your a small override % of the distributions and remaining cash after paying off the debt and my initial equity. You could also earn up to 5% of rent as an asset management and property management (if you performed these roles) fee.
Buy and Hold Investor · Knoxville, TN · Member since 2013 · 450 posts · 270 votes
10y
@ Chris Soignier, thank you for your response. What about that scenario is so unattractive to an investor? My lack of experience or something else? If I found the deal through my marketing and negotiated it, giving up all the equity is not attractive to me unless the point was to wholesale it to you. I thought a 50/50 split was reasonable.
Real Estate Broker · Destin, FL · Member since 2016 · 11 posts · 1 vote
10y
Chris,
Put yourself in the shoes of your brother, while you may be brings the knowledge of RE to the deal, he's bring the means to make it happen, the cash. I would set the deal up this way: if your going to hold the asset from 10yrs, let you brother receive more of the profit throughout the 10yr holding period to repay his 20% and then propose a equitable split at the time of sale. (Something, kind like what Chris S mentioned)
Keep in mind that the resale may or may not be higher when you decide to sell later, I would recommend, among other things, that you understand the classes and types of apts before you purchase and look at what they are selling for historically, if you know you want to use a resale as an exit. Please keep in mind a very universal sales principle, you make money when you buy not when you sell.
Lewis Center, OH · Member since 2016 · 23 posts · 12 votes
10y
@Chris Eaker Judging by your question that the investor pay for a 20% downpayment, I'm going to guess you are new to MF. If you are asking these other groups to invest in you & your deal when you are a newbie, you should expect to use the first deal as a "prove it" deal & get a lower % of the split. I would second Nick's suggestion that it be an 80/20 split (you get the 20) because you are new to MF.
I would suggest reading as many books about MF as possible - The ABC's of MF investing by Ken McElroy, Complete Guide to Apartment Buildings by Wiley - and listening to podcasts. Joe Fairless and Michael Blank are great MF resources with a ton of knowledge.
If you haven't already, listen to Michaels Blank's episode 16 to understand how the banks will look at you the investor and the criteria they use to determine if they will lend. His guest Charles Wentworth talks about lending 70% and needing personal assurance from the lead investor, who is on your team with MF experience, etc.
Michael Blank's deal syndication analyzer also helps crunch the numbers so you can see all the splits, relevant metrics, etc.
Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
10y
@chris eaker
Hi Chris
Partnerships can be created in any fashion. I think it is great if you can get 50% ownership with no skin in the game. The partner can expect a preferred return, before you both split cash flow. Listen to @bryan adams podcast on BP. He talks about syndication and how to structure deals
Buy and Hold Investor · Knoxville, TN · Member since 2013 · 450 posts · 270 votes
10y
@Kevin Cenna Thank you for your response. I am new to MF, thus why I am asking questions. I have read Lance Edwards' book, listened to several podcasts so far, and have read all I can find online from different websites like Property Metrics. I will definitely check into those books you mentioned. I think an 80/20 split is reasonable since I am not yet "seasoned." I do plan to buy the Syndication Deal Analyzer, but have not yet. I do have the Real Estate Investment Analysis program by RealData.com. It's good, but as far as I can tell, it doesn't give you the option of splitting ownership percentages like Michael Blank's product does (something I wish I had known before buying it).
Buy and Hold Investor · Knoxville, TN · Member since 2013 · 450 posts · 270 votes
10y
@Gino Barbaro I appreciate the tip for the podcast. I will be sure to listen to it. I have learned about preferred returns from listening to videos on Michael Blank's website, but I need to learn more. Can you recommend a specific resource to learn about that? Will that podcast you mentioned get into details about that?
Check out Brian's site. He is a syndicator. Look up any investor who syndicates deals. Listen to @jonathan twombley podcast. He has done some big deals.
I am going to be doing a podcast with Gene Trowbridge on Thursday. He is a security's lawyer who will explain the laws and define what a security is, etc. Raising money is not difficult, you just have to do it correct or put yourself at risk.
Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
10y
Raising capital is a skill. Like any skill it can be learned. But raising capital is not easy especially your first go round. Read my post in MF forum on top 10 things I learned in raising $1m in 2wks.
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
10y
@Chris Eaker Great advice from very experienced people. Invaluable.
Returns are influenced by supply and demand - supply of capital and supply of attractive investments. The General market's demands (as people have written here) are likely to be different than those of family/friend money. When you're talking ad hoc projects and friendly money, it really all is negotiable.
I have friendly money that I've let co-invest with me. I don't want to take advantage of them, but the reality is they'd be happy with much lower returns because their alternatives are limited. The terms I've set are fair to both sides. This may be the case with your brother as well.
Personally, I structure these as a preferred return on capital, then 75% to Class B (capital investors) and 25% to Class A (managing partner). Mgmt costs expensed.
So, to answer your question, your brother receives some preferred quarterly return on his capital. When sold, the waterfall looks like:
0. Repay any debt; close accounts payable.
1. Return everyone's capital.
2. Make sure the preferred return is met.
3. Whatever's left gets split 25/75 to you/him.
If you want more current income, add a mgmt fee and tweak his preferred return or equity split more in his favor.
Books are great on this subject. Also great to see what people are actually doing today is grabbing a double espresso and reading some of the LLC membership agreements for the investments on the various crowdfunding sites. That's really where we're headed.
Investor · Hopkins, MN · Member since 2015 · 2 posts · 1 vote
10y
Your math is flawed. If you bought the property for 1M wih 200K down, then the debt is 800K. When you sell it for 1.5M you get 700K back, not 500K (actually more than 700K as you paid down a portion of principal). So out of 700K your brother of course would expect to get his 200K back after which you can split your 500K profit.
If you do plan on getting into syndication, you may also want to read It's A Whole New Business by Gene Trowbridge and Principles of Real Estate Syndication by Samuel K Freshman.