Fair investor compensation

[Account Closed]

Hi Everyone,

I think I have found investors to partner with on a an apartment building deal. Was wondering if anyone has experience with this and what type of deal I can offer my investors. How much I should pay them monthly and what a fair return on their investment would be. There will be more than one investors. 

Thanks 

-Jax

[Jonathan Makovsky]

@Account Closed

There are typically four (and-a-half) areas for the Operator of the deal to make money. You do not need to do all of the below, but this is typically the way you make your money:

1) Acquisition Fee: When you buy the property you take an acquisition fee of the deal. It is often 1% - 2% of the purchase price.

2) Asset Management Fee: Every year you can take a certain fee for operating/overseeing the property. Often this is 1% - 2% of the asset.

3) Promote: Many sophisticated operators will pay their investors a "preferred return", and then once the preferred return is hit, then there will be a pro-rata split of the remaining funds. 

For example, if you have one investor that invests $100K and you offer that investor an 8% preferred return (aka a "Pref") with a 70% / 30% promote (or split) of the remaining funds (the 75% goes to your investor and the 25% goes to the operator). 

So in a situation where you make an $18K return, the first $8K will go to your investor for their 8% Pref, which leaves $10K leftover. In that case the next $10K will be split based on the 70:30 promote, or $7K for your investor and $3K to the operator. 

[Note: if their is a 2% Asset Management Fee that will often take place before the Pref - although I like to pay it after the Pref is first paid to the investors and then you take your Asset Management Fee.]

4) Disposition Fee: Once the property is sold you can take a fee for the disposition (i.e. sale) of the property, this can often be around 1%.

Sort-of 5) Property Management Fee: I write sort-of because this number is above the NOI (Net Operating Income) line and is therefore an Operating Expense and is part of the day-to-day of managing the property. However, the reason I include it is because if you are going to be managing it, it is still money you can put in your pocket AND should also be disclosed to your investor.

Happy investing!