How to attract investors?

Question

Jeff Greenberg · Answer

@Ross Sumner I don't know the area that you are working in, but I can tell you from experience that small deals are hard to syndicate.

You need to the investors that you know the numbers, the property, and the area. Most important what is in it for them and how they will get their money back, and how quick?

On that Cap rate, with only a value add of raising rents, you are going to have a real tough time getting anyone their money back. The cap is without dept. add 4.5% interest on your debt and you returns are dismal if the exist at all.  Add a preferred to investors and you will never see a dime for your efforts. Ask me how I know that!

How do you plan on doing a 1031 out? That will only work if the investor want to stay in for the next deal. You would have buy out anyone that does not want to stay in the entity.  This would require new money coming in.

Let's jump back to the beginning. Those of us that work with OPM have to find better deals then those that don't.  If we don't, the investor don't get a fair return, we don't paid, we go out of business.

Keep looking for the bigger and better deal to bring in investors.  In the mean time, spend a lot of time, putting yourself where you have a good chance of meeting investors, and find out what they expect from an investment.

Good luck

Pm me if you have questions.

Just curious, what is the gross rev?

Brian Burke · Answer

@Ross Sumner you have to figure out the exit strategy and model the financial performance over the life cycle of the investment and project the exit value and all of the cash flows to the investors including periodic cash flow from operations and capital events such as refinancing and sale.

While it might be your goal to own the property indefinitely for cash flow, investors don't typically subscribe to taking that ride with you. They are interested in their return ON their capital, but just as interested in the return OF their capital.

If you want to own indefinitely, that's fine, but it's a plan best executed with your own funds.  As @Jeff Greenberg alluded to, 1031 isn't an option...your investors own limited partnership or LLC interests which is not "like kind" for the purposes of an exchange. The only way to execute a 1031 in this case is if all of the investors are onboard and the entity that you use to own this property is the entity that you'll use to acquire the replacement property. A pretty unlikely scenario.

Your example is the quintessential "friends and family" deal.  A group of friends pool their money together and buy a property. Very common. Trying to go outside of the friends and family circle increases the cost and complexity considerably, which introduces challenges on a deal this small.

Taylor L. · Answer

@Adrian Stamer  I agree with your analysis of the area. There's one brokerage in particular that always seems to have a few extremely overpriced buildings up.

@Ross Sumner Where did you find the opportunity, out of curiosity? Broker? Networking?

Dave Foster · Answer

@Ross Sumner, certainly a smaller deal such as this is a much better candidate for a Tenants in common with master operating agreement situation.  This provides you with the ultimate flexibility to craft that exit strategy and for each investor use their own or a group 1031 to move forward or exit very easily.

However, don't let the fear of not being able to do a 1031 exchange keep you from setting up a holding entity framework if that is what you want.  With appropriate planning it is possible to use and LLC structure and still position each investor where they want to be after a 1031.  It just means that initially the 1031 will need to be done by the LLC itself.  And structural changes completed after.

Adrian Stamer · Answer

6.75% is a pretty poor cap rate for what you are calling an "improving" area in Richmond. You would have a rather hard time getting any good cash flow out of it also. With multi family "improving" is only good if you can steadily keep raising the rents to force the appreciation.

As someone who looks daily for deals in the Richmond market, you are going to have a pretty difficult time landing one of these that are worth a damn... But overpriced apartment deals that have been sitting on the market forever in lousy areas are pretty plentiful. Feel free to hit me up to chat more

Omar Ruiz · Answer

your plan should include what the current operations are and a proforma of what it will be in the future and how the investor will benefit.

Ntiense Inokon · Answer

@Ross Sumner I  agree with Percy. For your first deal you definitely want to partner with someone who has a great track record for closing deals and fulfilling his/her obligations. I would also suggest using the BP Rental Property Calculator. You can plug in the numbers and produce a professional spreadsheet, if you have a pro-membership. Also, be sure to estimate the potential rent by using the comps in the area.

Good Luck!

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