Multi-Unit Repair Costs

[Tj Hines]

Let's say if I have a 100 unit multi-family building and I'm partnering with 4 or 5 investors who is helping fund the deal. When it comes to repairs that need to be done to the building, is the money to make the repairs coming out of the cash flow that me and my partners are receiving each month?

Also how do let my investors know after they already have been promised a certain percentage of cash flow every month that repairs need to be made to the building whether it be minor or major? 

Is there some upfront agreement that needs to be made disclosing to the investor partners how repairs will be paid for ?

Thanks for your consideration.

[Michael Le]

You don't really want to do major capital repairs using the cash flow. You should be accounting for that when you buy and get the rehab costs as part of the loan. Obviously if you're holding it long term you will eventually have to do repairs. Your lender will require yearly capital reserves set aside to do these repairs, ranging anywhere from $250-400 a unit, depending on what their engineer finds during appraisal. 

Secondly, you should not be promising any sort of percentage to your investors unless they are debt partners, in which case they are really lenders. If they are truly partners then they should clearly and transparently know your plans and that you are shooting for a specific goal but no number is promised.

If you are the sponsor on the deal the upfront agreement is you run the deal and normal wear and tear repairs and turnovers, etc, will be handled by you with no involvement from them whatsoever. They will get distributions from the remaining cash flow.