Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
I've been discussing potential investment opportunities in apartment syndications with my network, and the toughest objection I've come across is...
"What if I need to get my money out early?"
Now, this is certainly a reasonable question and a valid concern for someone to have. I get it. Crap hits the fan and things can go very wrong with life and personal finance.
However, if this mentality is someone's inclination, I'm not sure how likely they are to actually become an investor. It shows how they see money and investing.
My response typically looks something like...
You can, but these aren't intended to be liquid investments. Don't invest your bottom dollar in anything and we will not accept your bottom dollar anyway.
Typically the sponsor will have first right of refusal to buy.
The sponsor will also have veto power regarding who you sell the investment to, if the sponsor refuses.
@Taylor L. I have a little different approach. I don't buy a property I wouldn't want to own completely myself so what I tell them is this:
First, you can't sell your shares in the first year. This is SEC rules (rule 144) not ours.
After the first year, you can sell your shares to anyone you want with one caveat, current members of the LLC have first right of purchase at the same price you can find a buyer on the outside.
I also tell them that if they ever need to get out before the hold period ends they should reach out to me first. In most cases, I would be able to buy them out.
Think about it, 2-3 years down the road you will know exactly how much the property is worth. If you followed rule #1 of real estate "make your money when you buy" then the property is worth more than it was when you bought it so being able to offer your investor to get their money out at what they paid for would be a steal!
if I could buy my investors out in every deal we do I'd be very happy...
@Taylor L. I have also gotten this response along with many others. When I am qualifying a prospective investor to see if we are a good fit for each other, I send them a list of FAQ's of what they should expect working with me on deals. My business is to acquire 100 to 400 unit apartment complexes.
Here is how I address I your question.
What if I need to get my money back early?
o Once you invest in the deal, generally speaking you are unable to get your money out early until the property is sold or refinanced. The managing member realizes that special situations do arise and the investor must contact the managing member to discuss. An investor will forfeit any equity in the deal if their investment is returned early.
@Taylor L. I have a little different approach. I don't buy a property I wouldn't want to own completely myself so what I tell them is this:
First, you can't sell your shares in the first year. This is SEC rules (rule 144) not ours.
After the first year, you can sell your shares to anyone you want with one caveat, current members of the LLC have first right of purchase at the same price you can find a buyer on the outside.
I also tell them that if they ever need to get out before the hold period ends they should reach out to me first. In most cases, I would be able to buy them out.
Think about it, 2-3 years down the road you will know exactly how much the property is worth. If you followed rule #1 of real estate "make your money when you buy" then the property is worth more than it was when you bought it so being able to offer your investor to get their money out at what they paid for would be a steal!
if I could buy my investors out in every deal we do I'd be very happy...
Yes, have fielded that question a few times. All good inputs above and definitely you should lead w/all that (conservative). One thing I do add however is this. Let's not forget that this is a "passive income" strategy. Value add syndicators will target a cash re-fi or supplemental loan typically in the 18mos - 36 mos range once renovations are complete and the rents (NOI) is now maximized. In our deal, we are also now moving to monthly distributions. So, yes illiquid but keep in mind this isn't a buy n hold and wait for a 5 yr capital event. The investor is getting cash along the way to provide some liquidity.... monthly or quarterly distributions plus a real shot at some return of capital in ~ 2yrs. We had a deal in Houston in 16 mos a $100K investment returned $46K including distributions over 5 quarters and a refi. If a life event happens very early in the program this won't help. But certainly understanding this w/the investor may ease some of the concern of a 5yr hold type mind set w/little return of capital opportunities.
I don't know anything about this as I've never put together a syndication but I figured I'd jump in with a question:
How would you know if someone were asking about an "out" because of the 1/1000 shot their personal finances implode vs. worries about "2008 all over again"?
And would the answer impact their options if they wanted to liquidate early?
Again, no value-add from me here but I've thought about joining a syndication before but can't get past the hurdle of others having a short-term (or just different) mindset that might sway investment decisions midway through the investment. I know that outside investors are supposed to be a passive LP, I just don't know how that works in real life.
Joseph you raise a good point - if I am offering a good investment opportunity, then why not take the opportunity to get a greater percentage for myself? Sounds like the biggest issue that arises is whether I have enough liquid assets to buy a particular investor out. Cross that bridge when I get there I guess.
In short - if it's a good deal, someone wanting out is a huge opportunity for me to grow my holdings, bring in someone else who is a better fit, or help another current investor make more money.
@David Thompson that's a very good point. The plan isn't to put the money in a lockbox and not hear from it for 3-5 years. The deal will be set up to kick them cash flow payments, potentially as frequently as monthly, or quarterly or semiannually.
@Andrew Johnson you bring up a very good point. I think it's hard to suss out how much of someone's concern is personal finance vs 2008 type crash. But as @Joseph Gozlan said, you make your money when you buy. If it's still a good deal and we go through another crash, then hey whatever. Good buying opportunity if someone wants to get out. Maybe you can get the shares back at a discount. The point is to abate that fear upfront and have a viable disposition plan for shares down the road.
Taylor L. I think you hit my thought process on the head, you'd want to have some provision in there about selling your share back at a discount. Otherwise skittish people *might* want to jump out early as their only consequence is a lack of return. If they had to take a 30% haircut on their investment it would provide both a financial emphasis to stick it out for the long term or a significant economic upside for the buyer of that persons stake. Of course, me thinking that potential onerous terms and conditions for LPs (as a potential LP) is maybe why I haven't done it! Well, not for real estate anyway.